We appear to be headed for another nasty tax debate, with Republicans unequivocally asserting that after the fiscal cliff deal, they’re out of the tax increasing business and Dems/WH standing firm that further deficit reduction should be balanced between spending cuts and tax increases.
Should balance in fact prevail, as it should, and given that it seems unlikely that tax rates will rise further in the near term, where should any new revenue come from? Surely closing loopholes makes sense as Republicans themselves have called for this as a preferable way to boost revenues compared to higher rates.
But reading this NYT editorial this AM I was struck by the sensible argument that corporate tax reform should also be a candidate for higher tax revenue. There’s long been interest in revenue neutral corporate tax reform and the White House has offered a fairly detailed outline to take the statutory rate down from 35% to 28% and making up the difference by closing some large loopholes, including overseas deferral, depreciation, and the tax bias toward debt vs. equity financing.
But even the Treasury talks about this idea as revenue neutral, when there’s no reason it shouldn’t be revenue positive (actually, they say corporate tax reform shouldn’t add to deficits…so it could decrease them! (h/t: CCH)).
The first figure below shows the long-term decline in corporate tax receipts to the federal government as a shares of GDP and of total receipts (the latter on the right axis). Back in the 1960s federal taxes from corporations accounted for about 4% of GDP, but since the mid-1980s, they’ve hovered around 2%. They used to account for 25% of federal tax receipts; now there at about 10%.
Why is that? There are a lot more tax expenditures, e.g., tax breaks for favored investments (like this one), there’s a lot more overseas income that escapes US taxation, more debt financing, heaving favored in our corporate code, and much more passing through of what used to be corporate income to the individual side of the tax code, to take advantage of things like lower rates on capital gains realizations.
That list seems awfully ripe for base-broadening reform.
The second figure shows corporate receipts as a share of corporate profits, a rough proxy for an effective corporate rate, and here again you see historically low levels.
So while the conversation should certainly start with ideas to lower the rate and broaden the base, it should definitely not be constrained by revenue neutrality. In fact, locking in these historically low revenue levels, either as a share of GDP, total receipts, or profits, would be yet another self-inflected wound.
Source: BEA NIPA Tables, receipts are for federal sector only.