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US Senate Democrats Unveil a $26 Billion Tax Cut Measure

Democrats and Republicans in the
U.S. Congress are using the run-up to the April 17 tax-filing
deadline to test some of the arguments they want to deploy
during a broader tax-code rewrite.

Both parties are offering temporary tax incentives designed
to spur small-business growth. They’re pulling different policy
levers to appeal to the same favored group during tax season,
with Democrats proposing targeted tax breaks and Republicans
backing rate cuts.

Senate Democrats yesterday unveiled a $26 billion tax cut
plan for companies that make capital investments and expand
their payrolls. House Republicans tomorrow are set to push
through the Ways and Means Committee a 20 percent tax cut that
would direct $45.9 billion to businesses with fewer than 500
workers.

“They’re good symbols of the two different approaches, but
I think they’re also unlikely to be bridged,” said Todd McCracken, president of the National Small Business Association
in Washington.

Lawmakers of both parties favor benefits for small
companies in part because mom-and-pop businesses are among the
most popular institutions in the country. A 2011 Gallup poll
found that 79 percent of Americans trust small business owners
to come up with ideas for job creation, outpacing both parties’
leaders in Congress, who polled at less than 45 percent.

Uncertainty, Complexity

McCracken said benefits from the temporary proposals would
be countered by the uncertainty they create and the complexity
they require.

“All the temporary tax provisions that we’ve seen enacted
and talked about the last few years really has crystallized in
small business owners’ minds the need for a total overhaul of
the tax code,” he said. “You realize more and more this is no
way to run a railroad.”

Lawmakers in both parties say they want to rewrite the U.S.
tax code to make it simpler and more consistent. While they do
that, they are proposing short-term tax breaks.

The Democratic proposal, released by Senate Majority Leader
Harry Reid and New York Senator Charles Schumer, would revive a
tax break that expired at the end of 2011. Companies would have
another year in which they could write off 100 percent of
capital investments.

That 100 percent write-off could benefit larger companies
able to accelerate their investments to take advantage of it.
Companies including Textron Inc. (TXT) and Time Warner Cable Inc. (TWC) are
lobbying for the tax break, according to Senate records.

Expanding Payroll Benefit

The Democrats’ plan also would provide a 10 percent income-
tax credit for the first $5 million that a company adds to its
payroll in 2012, either through wage increases or hiring. The
cap, which limits the benefit to $500,000, directs the largest
percentage benefits to smaller companies.

Schumer and Reid emphasized that their bill would reward
companies that are growing and investing.

“This is the kind of legislation that should not be a
fight,” Reid, a Nevada Democrat, told reporters during a
conference call yesterday. “This a place where Democrats and
Republicans should be able to find common ground.”

The Republican proposal, introduced by Majority Leader Eric Cantor of Virginia, would let companies deduct 20 percent of
their profits. It would prevent companies from qualifying based
on certain types of passive income, and it limits benefits to 50
percent of wages paid to employees who aren’t owners.

Cantor’s bill could benefit larger companies that are able
to generate significant profits with relatively few employees.
He emphasized that his bill would provide cash to business
owners to reinvest in their companies.

Similar Provisions

There is some overlap between the proposals. Republicans
included the capital investment provision in a bill the House
passed in December 2011 that extended a payroll tax cut through
2012. It was dropped during negotiations with the Senate.

Neither proposal includes provisions to prevent the budget
deficit from expanding. Senate Democrats said they want to work
with Republicans on that issue.

Both parties’ policies have drawbacks, said Alan Viard, a
resident scholar at the American Enterprise Institute, a
Washington group that favors strengthening free enterprise.

In the long run, he said, the House rate cut is the better
approach as long as it doesn’t increase the deficit. The House
plan doesn’t work as well as temporary policy.

‘Already in Place’

“It’s not the most powerful approach,” he said. “It
rewards investments that are already in place.”

The Senate bill would be somewhat more effective in
spurring short-term growth, Viard said. Still, administering the
credit for payroll growth could be complicated and reward
companies that don’t change their behavior.

“Some of the firms that get a tax break here would be
firms that would have increased their payroll anyway,” he said.

Douglas Holtz-Eakin, who in 2008 advised Republican
presidential candidate John McCain on economic policy, said he
prefers the rate cuts, if they are offset by spending cuts.

Neither the House nor Senate bill is better than a tax-code
overhaul, he said.

“You can say the same things about both efforts, which is
that they are reflective of the genuine importance of small
business to creating jobs,” Holtz-Eakin said. “Neither has a
snowball’s chance in hell of being passed.”

The Cantor bill is H.R. 9.

To contact the reporter on this story:
Richard Rubin in Washington at
rrubin12@bloomberg.net

To contact the editor responsible for this story:
Jodi Schneider at
jschneider50@bloomberg.net

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