NCPA - National Center for Policy Analysis


April 28, 2008

Less than a year ago, Max Baucus (D-Mont.), the chairman of the Senate Finance Committee, and his Republican partner Chuck Grassley were promoting a punitive tax hike on hedge funds and private-equity shops.  Now it appears that Baucus, at least, is having second thoughts, says the Wall Street Journal.

Baucus's about-face arrives in the form of a plan to lower the tax burden for U.S. timber companies, which he is trying to graft onto the farm bill now moving through Congress:

  • Timber sales are treated as capital gains, taxed at 15 percent.
  • Timber companies, however, face the full 35 percent corporate tax rate.
  • To pay the 15 percent, many companies have restructured as real-estate investment trusts or transferred holdings to individuals, but not all.
  • Baucus wants to equalize the tax treatment of all timber concerns, regardless of the corporate structure.

As Baucus notes, everyone deserves the same standard in a competitive market. It also seems right to treat timber income as capital gains, given long growth cycles, high front-end costs and vulnerability to natural risks.

But apparently some businesses are more deserving of special treatment than others, says the Journal.  While all politicians have favored constituencies, at least Baucus has had the courtesy to acknowledge his arbitrary assault on private equity.  Still, this is no way to write tax policy.

The larger point is that America as a whole would be far better off if all U.S. companies paid the same low corporate tax rate -- if not 15 percent, then no more than 25 percent.  If the rate was lower for everyone, neither timber nor private-equity interests would need to lobby for a special, lower rate.  More important, fewer U.S. companies would feel obliged to build their next plant in Ireland or other low-tax countries.

Source: Editorial, "Timber!" Wall Street Journal, April 28, 2008.

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