Based on the Numbers, How Urgent is Revenue Neutral Corporate Tax Reform? (Answer: not very…)

August 1st, 2013 at 3:54 pm

The other day I endorsed President Obama’s new offer of a corporate tax cut in exchange for some temporary jobs measures in infrastructure and manufacturing.  My endorsement was a bit grudging, though, because it’s not obvious to me that we need a big corporate tax cut while it is obvious that revenue neutral proposals like this one can be problematic.

How so?  First, if we’re going to meet the challenges we face down the road, from retirement security to the safety net to investments in kids’ mobility to productive public goods, we’re going to need new revenues.  There’s no other way we can get there from here while maintaining a sustainable budget, absent unacceptable spending cuts (see House budget).

Second, this lower-the-rates-broaden-the-base tactic raises the specter of the tax-reform trap.  More on that in a moment.

Counter to that is that idea that our corporations’ competitiveness is being hurt by the relative high US corporate tax rate of 35% (the President’s proposal would take the statutory rate down from 35% to 28%).  I’d take that more seriously if the effective corporate rate wasn’t a lot lower than the statutory rate—around 28% overall and a lot lower (18.5%) for profitable Fortune 500 companies.  Still, it would surely be better simplify the corporate code, close some loopholes, and depending on how much we broadened the base, give back some points on the rate.

So I get the competitiveness argument in theory.  But in practice, it really looks like US corporations are a) uniquely profitable and b) contributing historically low shares of revenue to the national coffers.

The first figure shows federal corporate tax receipts as a share of GDP (left axis) along with a kind of proxy measure of their effective tax rate: tax receipts over pretax profits (right axis).  There’s bips and bops along the way, but the trend is clearly down.  Taxes as a share of profits are down by about half, from 40% to 20%; revs/GDP are down from about 4.5% to about 2%.

corp_tax

Source: BEA

The next figure shows after-tax profits as a share of GDP to be near an all-time high.  In fact, the extent to which corporate profits bounced back from the financial crisis is quite remarkable, especially compared to so many other parts of the economy that are still just slogging along.

corp_prof

Source: BEA

Clearly, these are very tough times for political compromise, wherein you’ve gotta give something to get something.  But I think these pictures would lead an objective onlooker to be more than a little skeptical of revenue neutral corporate tax reform.

A final point: the tax reform trap is what you get stuck in when policy makers sign off on an alleged neutral deal but end up with a lower rate, a base that is only slightly expanded, and less revenue.  My CBPP colleagues are looking into this, but it’s really expensive to take seven points off the rate.  There may well be loophole, deduction, and credit-closure proposals that would fill a revenue hole of that magnitude, but that’s still to be seen.

Like I said, I’m sure our companies waste far too much valuable time both complying with and skirting a messy corporate tax code.  But on competitive, revenue, and fairness grounds, it’s hard to see a compelling and urgent case for revenue neutral reform.

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4 comments in reply to "Based on the Numbers, How Urgent is Revenue Neutral Corporate Tax Reform? (Answer: not very…)"

  1. Jill SH says:

    Hmmm. I too am concerned that closing-loopholes/broadening-the-base/lowering-the-rate might be a pig in a poke. Something else I’d like to see is a taxing bias that prefers businesses that create good, well-paying, long-term jobs, such as manufacturing, instead of more financial “services”.

    And hearing that biggies like GE and Apple make huge profits and pay low or no corporate taxes, makes me wonder if we might be able to create a corporate alternative minimum tax. (I have no clue how you’d do that. I’ll leave to you econowonks to think it up.)

    Lastly there’s always my favorite: the financial transaction tax. That’s gotta be in the mix somewhere.


  2. Perplexed says:

    -“First, if we’re going to meet the challenges we face down the road, from retirement security to the safety net to investments in kids’ mobility to productive public goods, we’re going to need new revenues. There’s no other way we can get there from here while maintaining a sustainable budget, absent unacceptable spending cuts (see House budget).”

    There is no requirement for business to adopt a corporate form of organization, and if they wish to avoid corporate taxes they have other choices. Since the corporate form of organization was established to provide limited liability to investors in exchange for what was intended to be compensatory public benefits of having them, maybe its time to eliminate them altogether as the “public benefit” side of the equation has proved so illusory. If investors desire “insurance” against unlimited liability let them buy it in the “free market” or perhaps the government can provide it at “market rates.” Allowing this to be framed as a “need to compete” to attract these organizations that provide so little public benefit only leads to a “race to the bottom.” The winner of the race looses the most. Such a small percentage of the population sees any benefit from these organizations that its probably time to re-think the whole cost/benefit reality of providing this form of corporate welfare and having the public pick up all of the downside risk. If the taxes are so high, why doesn’t an insurance company provide the same insurance to proprietors and partnerships for a lower cost? What better indicator do we need that the taxes charged aren’t high enough to avoid the public having to provide free insurance?


  3. urban legend says:

    Right now — for 2014 and 2016 — tax reform is a big ho-hum. The only thing that matters is whether something will create more jobs and make the jobs that are there pay better. Don’t even talk much about inequality any more, because it’s too abstract. Economists who care about policy need to toss aside all tut-tuts about NAIRU. Full employment is what will do the most to solve the problems we have, including making a dent on inequality by forcing wages upwards. Doing anything positive now means getting rid of Republicans. Infrastructure is the only thing that will create jobs directly. Republicans will block the only thing that will work, so the only policy that really matters right now is politics.


  4. Dave says:

    Jared,

    I think that I understand the P’s desire on this because I was once of his same frame of mind. Prior to the election I believed that revenue-neutral tax reform was required and that it was something that has been put off too long.

    I just think the P never quite understood the complete change that happened with the collapse. I think he’s still trying to fix things that he determined should be fixed long before taking office, and apparently nobody has made it clear to him the implications of continuing to pursue that in these political-economic conditions.

    So if it isn’t clear to him, let is state it more clearly: If you continue to pursue fiscal ideas that you believed important prior to election, you might well drive this country’s democracy into the ground.

    This is one situation in which those long-term agendas have to be dropped and economic recover have to be top of the priority list. I’m not sure this message can ever get through given the people who have tried and failed to deliver that message, including Mr. Bernstein.


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