Corporate Tax Reform: Be Careful What You Wish For

February 22nd, 2012 at 8:27 am

Pretty much every discussion of tax reform these days ends with an agreement that we need to broaden the base and lower the rates.  Well, the White House today will release the broad outlines of a plan to do just that on the corporate side of the federal tax code.

According to advance info from this AMs NYT, the proposal will be to cut the current top corporate rate of 35% down to 28%, and to close a bunch of loopholes to make up the difference.   Some other features include:

–a lower rate—25%–for manufacturers;

–a minimum tax rate on foreign earnings to discourage tax sheltering by multinationals;

–added incentives for R&D (probably making that tax credit permanent, something the admin has long supported) and clean energy investments;

–a bunch of other loophole closures…

And therein lies the rub.  It is widely recognized that many corporations already pay far less than the statutory rate–from the WaPo story on the proposal:

Today, the U.S. corporate tax rate of 35 percent is one of the highest in the world, but an abundance of loopholes and deductions means that many companies pay far less than that — or nothing at all. Companies in the United States pay almost half the taxes than companies do in other rich countries, compared to the size of the economy, according to the Organization for Economic Cooperation and Development.

Last I checked, we were collecting around 1.3% of GDP in revenue from the corporate sector.  That’s low both in our own historical terms (the average has been about 2% over the past few decades) and especially in international terms, despite the fact that we have a higher statutory rate.  And it’s not just the recession depressing corp revenues, though that’s part of it, because corporate profitability is once again soaring.

This tells you two things.  First, a lot of companies take advantage of the breaks in the code and second, getting to a revenue-neutral 28% will mean taking away a lot of those goodies.

Some of the biggies are accelerated depreciation, interest deductibility, the ability to pass corporate capital gains over to the individual side of the code (where it gets favorable treatment), and a bunch of international loopholes, like deferral—the ability to avoid US taxation by holding multinational profits overseas.

I don’t think today’s release will go into much detail on specifics but the implication is clear: if those who have been clamoring for a lower corporate rate are serious, they need to step up and support these loophole closures.

In that sense, the White House’s proposal creates an interesting political challenge.  For years now, American corporations and their reps here in DC have been calling for a lower rate while at the same time availing themselves of billions in tax breaks that have kept them from paying the statutory rate.   In my debates with supply-siders, they’re all about the rate…they’re happy to trade more base for points off of the rate.  In the next chapter of this debate, we’ll get to see how much they meant it.

Everyone loves the first part of the mantra: lower the rates.  Now let’s see how the feel about the second part: broaden the base.


Print Friendly, PDF & Email

10 comments in reply to "Corporate Tax Reform: Be Careful What You Wish For"

  1. Fred Donaldson says:

    If corporations are now considered “people”, the fair thing is to tax them at the same individual income tax rates of other “people.”

    And shouldn’t we look at corporate “people”, who claim heat and utlities as expenses, have auto fleets bought tax free, and even deduct vacations and lunches, while the poor pray for food stamps.

    You can’t be “people” if your “fair share” of taxes is already less than the guy fixing your roof.

    The privileged in this country continue to want it both ways, low taxes for them, high taxes for the workers, and meanwhile government is enabling a few of the very rich to contribute millions to politicians quite willing to put more burden on the working class that will result from lower levies on the upper crust.

    • Tom Shire says:

      Interesting proposal. And thanks for bringing back the term “upper crust.” It’s been a while since I heard it, and I am only just now understanding its true meaning: The calcified, top-most layer which often stubbornly refuses to relinquish its privileged position.

  2. Michael says:

    Corporate tax reform is irrelevant. What I want is corporate death penalty reform — I want Texas to execute corporations for wrongdoings as eagerly as it executes human beings. And none of this “race to the bottom” crap where charters are carefully vouchsafed in Delaware. Every state should have access to the corporate charter.

    Fundamentally, if a corporation kills someone, or an economy, I want it to end. If I’m not allowed to touch the management for their crimes, I at least want the shareholders to pay so grossly that they will take a few moments to look at what’s going on in the company before buying.

    • Lars Olsson says:

      I’d be for that. “Personhood” has its drawbacks as well as its benefits. Like going to jail forever or being executed for serious-enough crimes. There’s got to be a point of entry to the moral side of investing. If corporations not only can’t be blamed for doing everything in their power to seek the highest profit/revenue possible, then it’s got to be either at the mutual fund level, or at the individual investor level.

  3. wkj says:

    Jared–Do you have a view on the 2007 proposal by University of Texas law professor Calvin Johnson to change the basis of the corporate tax from income to market capitalization?

    While this proposal would be a dramatic structural change from the current law, it seemed to me to have major advantages in terms of simplicity and efficiency.

  4. Leo from Chicago says:

    “Get rid of the loopholes, lower the rate” We heard the same story from Reagan in 1986. And as soon as the rates came down, the loopholes came roaring back.

    Not my definition of ‘reform’.

    • Nhon Tran says:

      Thank you. Then when loopholes re-emerge in future, do another round of “closing loopholes/broadening the base and lowering the rates.” Many years ago, Dr Paul Krugman remarked that “bad policies are like cockroaches. You flush them down the toilet but they keep coming back. The job of government economists is to keep flushing them down the toilet.” Regards.

  5. Jerry Thomas says:

    If corporations are people, why aren’t small businesses defined by revenue (i.e. <$1,000,000)? why not have a standard deduction (i.e. $250,000)? why don't we utilize progressive tax rates? Why don't we eliminate all tax loop holes (expenditures should move to the budget if needed)?

  6. Bud Meyers says:

    Should C-corporations and S-corporations both be taxed at the same rate of 28%? And should dividends and capital gains also be taxed at 28%? And should the top marginal income bracket for individuals who own sole proprietorships also be taxed at 28%?

    “Many analysts believe that the tax treatment among different forms of business organization ought to be equalized. The White House-Treasury report estimates that the effective marginal tax rate on new investments is 32.3 percent for C-corporations and only 26.4 percent for pass-through entities. This distortion biases economic decision-making and is ultimately bad for growth.”