Why Corporate Tax Reform is Hard

March 30th, 2013 at 4:23 pm

Prepping to talk about corporate tax reform on MSNBC at 2’ish, I stumbled on this ‘graf from this WSJ piece.  I thought it was a tight summary of a basic fact of reform:

Companies with huge capital investments, such as manufacturers, care a lot about the terms of writing them off; companies in labor-intensive business don’t. Companies with big overseas profits focus heavily on how those earnings are taxed; primarily domestic companies don’t.  Companies who get little advantage from all the existing credits, deductions and loopholes are ready to sacrifice them to bring down the corporate-tax rate; those who benefit, not surprisingly, aren’t.

I’ve often summarized the above by maintaining that your loophole is my treasured job creation program, but it’s actually basic arithmetic.  Based on all kinds of factors, many of which are arbitrary (debt financing is heavily favored relative to equity financing; earnings abroad are protected relative to earnings here (!!)) some producers pay higher rates than others.  So if we’re growing to bring down the overall rate, than those paying above the average will come down and those below will have to come up.

Those of you with an historical bent may be wondering how we pulled this off in the 1986 reform.  There’s a lot to say about that but a simple summary is that lobbyists held less sway (yes, there was lots of money in politics, but not as bad as it is now), members were a bit more willing to disobey them, and there was much more working across the aisle.

What should corporate tax reform look like?  Like this, IMHO.

 

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3 comments in reply to "Why Corporate Tax Reform is Hard"

  1. Perplexed says:

    -“your loophole is my treasured job creation program, but it’s actually basic arithmetic. Based on all kinds of factors, many of which are arbitrary (debt financing is heavily favored relative to equity financing; earnings abroad are protected relative to earnings here (!!)) some producers pay higher rates than others.”

    It’s really difficult to do precision work in the dark. We should probably turn the spotlights on so everyone can see clearly what’s going. If we start with “revenue” as what would be collected in the absence of “special rates,” loopholes, and other tax expenditures, and then show a choice to forgo the revenue as an expenditure, everyone can see the real picture and put it in perspective with other expenditures. If the data are there, why do we allow the obfuscation and “go along” with the ruse?

    -“…a simple summary is that lobbyists held less sway (yes, there was lots of money in politics, but not as bad as it is now), members were a bit more willing to disobey them, and there was much more working across the aisle.”

    In a true democracy, power is a zero sum game. Every bit power in the hands of lobbyists, corporations, PACS, and other non-members of the “eligible to vote electorate” was taken from someone (or some group) who was an actual member. The fact that so many have been rendered powerless would be telling us what’s wrong if we were tuned to the right channel.


  2. Smith says:

    Call it what you want, but the tax reform act of 1986 was no act of reform, at least for any liberal minded American. Just because Democratic Senator Bill Bradley was a principal in formulating the legislation, this did not justify labeling it reform. Just because it simplified the tax code did not make it reform. The benefits of lowering top tax rates were immense for the truly wealthy and the effects reverberate today. Democrats were essential in passing Reagan’s economic program and establishing his legacy. They were again an essential element in passing the Bush tax cuts, and retaining them for anyone earning less than $400,000 a year. Because after all, who can make ends meet on the paltry sum of $400,000? Let’s lay off teachers instead. Obama favors lower corporate rates when they should in fact be raised. Corporate profits are at record highs, cash retained likewise, while wages are held in check except for executives. We should raise rates, close the stock option pay loop hole, or better yet cap deductions for executive compensation. But please, no so called “reform” efforts until we have a congress that can pass something truly worthy of the name. Top marginal personal rates also need to increase, lowering them is not reform.


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