Amid the current debate over tax policy in Washington, there is a bipartisan consensus on one issue: the corporate tax rate, which is currently 35 percent, should be reduced to roughly 25 percent. At the same time, budgetary pressures preclude any significant increase in the deficit to accomplish corporate tax reform.
Category Archives: Corporate Governance
Capping the Deductibility of Corporate Interest Expense [Tax Notes]
Co-authored with Lucas Goodman
From the abstract:
Many lawmakers have indicated support for reducing the statutory corporate tax rate from 35 to 25 percent on a revenue-neutral basis. However, they have not made clear how they would broaden the base enough to pay for that rate reduction. This report proposes a specific approach for revenue neutral corporate tax reform: limiting the tax deductibility of interest expense for C corporations.That would significantly reduce the tax code’s bias in favor of debt-financed investment relative to equity-financed investment, while keeping the overall cost of capital roughly the same.
The authors propose reform that lowers the corporate tax rate from 35 to 25 percent and allows nonfinancial C corporations to deduct only 65 percent of their interest expense, with special treatment for the financial sector and for companies that
would have otherwise realized taxable losses. Based on a static analysis of aggregate data between 2000 and 2009, the authors calculate that the revenue loss from lowering the corporate tax rate to 25 percent would have been about the same as the revenue gain from their proposed limits on interest deductions.
Getting Wall Street Accountability Right [Real Clear Markets]
When it comes to the financial crisis of 2008, there’s certainly no shortage of blame. But who should be legally liable for any wrongdoing that occurred? In my view, enforcement actions should be brought for two primary purposes: to increase accountability and deter future wrongdoing. In most cases, that means focusing attention on the individuals who committed the alleged bad acts, not the corporate entities. Unfortunately, the SEC and other agencies have often brought actions against the corporate entities instead. Here are two particularly egregious examples.
The SEC vs. J.P. Morgan [Wall Street Journal]
J.P. Morgan Chase & Co. announced last week that it had agreed to settle a multiyear probe by the Securities and Exchange Commission. The probe alleges that Bear Stearns (which J.P. Morgan acquired in early 2008) failed to disclose key information about the mortgage-backed securities it sold—such as the low quality of the mortgages underlying them. Under the proposed settlement, J.P. Morgan will pay an undisclosed amount, but no individuals will be charged.
The Underfunding of Corporate Pension Plans [Real Clear Markets]
The current low level of interest rates poses a big challenge to pension plans with benefits guaranteed by their corporate sponsors. These pension plans have a difficult time earning a decent return from high-quality bonds with relatively low risk.
In response, Congress has recently revised the rules for calculating the obligations of corporate pension plans. But these revised rules allow corporate pension plans to assume that they will earn unrealistically high returns. As a result, many corporate sponsors will not contribute enough to meet their likely benefit obligations to retirees.
In China, big opportunities for investors, if mutual funds can find a way in [Washington Post]
Co-authored with Theresa Hamacher:
For U.S. mutual fund marketers, China is the Holy Grail. Given the country’s fast-growing economy and its large and rapidly aging population needing to save for retirement, China’s fund market has enormous potential for growth. Although the fund industry started in China only a decade ago, funds in that country already hold close to $350 billion in assets. And given the expanding size of China’s economy, its fund assets could easily grow to several trillion dollars over the next decade. But the Chinese market has been tough for U.S. firms to break into, because both regulation and local preferences tend to favor homegrown funds over U.S.-sponsored offerings. In general, China encapsulates the difficulties that investment managers must address when trying to export mutual funds — one of the United States’ most successful financial products — to other countries.
Reform needed in China’s fund business [Financial Times]
I recently returned from a trip to Beijing, where I launched the Mandarin translation of a book that I co-authored with Theresa Hamacher entitled The Fund Industry: How Your Money is Managed.
The book was translated because the Chinese fund industry is expanding rapidly; Chinese mutual funds were introduced in 2001 yet held over $340bn in assets by the end of 2011.
Mandatory audit rotation risks outweigh benefits [Economia]
Since the financial crisis, mandatory rotation of audit firms has been a subject of debate on both sides of the Atlantic.
Last year, the European Union proposed requiring auditors to rotate every six years (or every nine years if the company has two auditors).
In February, the lower house of the Dutch parliament voted to require automatic rotation every eight years. The U.S. Public Company Accounting Oversight Board (PCAOB) held hearings in March on the same subject.