Treasury Nominee DeniesTax Overhaul Plan In Works

Tax reform does not appear to be going anywhere fast in Washington, D.C., although that hasn’t stopped private equity’s lobbyists from pushing to protect the deductibility of interest payments.

The nominee for an influential Treasury Department post said today the Obama administration is not actively working on a plan to revamp the tax code. “We’d be negligent if we weren’t doing foundational work … But at this point there is no plan that is being developed,” Mark Mazur, President Obama’s nominee for Treasury’s top tax job, said at a Senate panel hearing on his confirmation, sister news service Reuters reported.

Mazur, who is now deputy assistant Treasury secretary for tax analysis, would become chief of Treasury tax policy if confirmed by the Senate. He spoke before members of the Senate Finance Committee, at a hearing on his nomination.

Meantime, the Private Equity Growth Capital Council published a report by the accounting firm Ernst & Young today arguing that limits on the interest deduction would deter investment, even if the cost of the deduction’s limits were offset by reducing overall corporate tax rates.

Some proposals in Washington could limit the deductibility of interest expenses, the Private Equity Growth Capital Council noted in issuing its report, citing President Obama’s Framework for Business Tax Reform and the Wyden-Coats Bipartisan Tax Fairness and Simplification Act.

“Such limitations raise the cost of new investment by significantly more than an equal cost reduction in the corporate income tax rate lowers the cost of new investment,” authors Robert Carroll and Thomas Neubig of E&Y wrote in their 21-page analysis. “The resulting lower level of investment would have the potential to impede rather than encourage economic growth.”

Comparing current tax law (a 35 percent top corporate tax rate and no limitations on interest deductions) to the Wyden-Coats plan (a 24 percent rate but an interest deduction “limited to non-inflationary component”), Carroll and Neubig calculated that such a change would in fact raise a company’s marginal effective tax rate to 33.1 percent from 31 percent, reducing its after tax returns. “The resulting lower level of investment would have the potential to impede rather than encourage economic growth,” they wrote.

At least one tax expert agreed that lawmakers are running large economic risks by even threatening to tinker with the interest deduction. “When you have a concept that is established in tax law for so long, a concept that is part of the lexicon,” said Isaac Grossman, the head of the tax department at the New York City  law firm Morrison Cohen LLP, “to change that is a dangerous move because you don’t understand the ripple effects” that such a change could cause.

The interest deduction has been a part of tax law since the corporate income tax was established in 1909, and Grossman predicted that businesses “across the board,” not only those backed by financial sponsors, would feel the impact, meaning disruptions to their operations and to overall economic activity.

“It really is important to nip this in the bud,” said Grossman, who was not involved in the council’s study. “I think that is what they are trying to do.”