With the United States a little financially strapped right now,
lawmakers are including
all kinds of remedies
-- including a major overhaul of corporate tax laws.
Our current system's
odd features
often leave observers scratching their heads or shaking their
fists. For companies and individuals alike, the sheer complexity of
the tax code is a problem in and of itself.
ExxonMobil
, with tax returns running 20,000 pages, houses 35 full-time IRS
employees at its headquarters just to help it stay in compliance.
The tax returns of Warren Buffett's
Berkshire Hathaway
take up roughly 14,000 pages. Simplifying the tax code would save
many companies considerable time and money.
A 25% solution
One reform that many have suggested, and which is currently being
considered, involves lowering the corporate tax rate from its
current 35% rate, while eliminating many corporate tax breaks. You
might think that the business world would rejoice at such a
reduction, but many businesses enjoy so many tax breaks and
deductions that they effectively pay far
less
than 25% already.
According to the angry-about-corporate-taxes organization Pay Up
Now, for example,
Abbott Labs
(
ABT
) paid the equivalent of a U.S. tax rate of 15% between 2008 and
2010, while
Caterpillar
(
CAT
) paid 5%. Companies that may see their tax bills shrink include
MedcoHealth Solutions
(
MHS
) , with a 2008-to-2010 rate of 38%, and
Lowe's
, paying 33%.
If reforms truly wipe out government subsidies and tax breaks,
certain industries will really get pinched, particularly
alternative energy companies
.
JA Solar
(Nasdaq: JASO) , for instance, paid a 12% tax rate in 2010.
Getting territorial
Another reform on the table would make our corporate tax system
"territorial," like those of many other nations. A fully
territorial system would exempt profits generated abroad from
taxation in the U.S. As you might imagine, many
global giants
are salivating at this thought. After all, in 2010, 93% of
Citigroup's
(
C
) profits were generated outside the U.S., while that number was
64% for
General Electric
(
GE
) and more than 88% for
Cisco Systems
(Nasdaq: CSCO) .
The corporate tax laws might not become fully territorial, but
it's possible that they may become somewhat so.
A simpler tax system could be much less expensive to operate,
and may generate more much-needed revenue for our country. But it's
far from a sure thing, given the influence of massive corporate
lobbying. Still, if big changes do make it into law, many otherwise
excellent investments might get whacked hard.
Grab profitable tax tips in our
Tax Center
, and learn
about
two compelling small-cap companies the government won't let
fail in this
special report
.
Longtime Fool contributor
Selena Maranjian
owns shares of Berkshire Hathaway.
Click here
to see her holdings and a short bio. The Motley Fool owns
shares of Abbott Labs, Berkshire Hathaway, and MedcoHealth
Solutions, and has created a bull call spread position on
Cisco.
Motley Fool newsletter services
have recommended buying shares of Cisco, Abbott Labs,
Berkshire Hathaway, Lowe's, and MedcoHealth Solutions, as well as
writing covered calls in Lowe's. Try any of our Foolish
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