Corporate Tax Reform Should be Revenue Positive

January 7th, 2013 at 8:40 pm

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.


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8 comments in reply to "Corporate Tax Reform Should be Revenue Positive"

  1. Rima Regas says:

    The problem, when looking at this, is starting from the assumptions that the political dysfunction plays no part, and that the political players are participating in the game, honestly.

    Neither party, in the end, is interested in really making the changes they all know need to be made. They’ve all spoken of loopholes and none, save for a few on the far left, have listed which they’d close.

    Add to this McConnell’s mission to signal that the Fiscal Cliff bill embodies all intended effort to raise revenue.

    We should have gone over the cliff.

  2. Fred Donaldson says:

    Now that corporations are people, their income should be taxed as people.

  3. Th says:

    I would rather stop taxing corporate profits entirely and replace the revenue (plus a little) with a carbon and/or stock transactions tax and taxing dividends as regular income. Corporate tax policy is arguably the most toxic cesspool of campaign finance and public brainwashing driven bad policy making not to mention the incredible waste of resources in tax avoidance schemes.

  4. fausto412 says:

    “lower the rate and broaden the base”

    Stop saying that. That’s adopting GOP language. Say “close all loopholes, and tax all income. add a provision that if the company is headquartered outside USA they will pay tariffs or provide equivalent income and lifetyle overseas.”

    We have to stop this ridiculous tax dodging and cost cutting by outsourcing.

  5. Guest says:

    I believe that POTUS has said he does want to make it revenue neutral, but at the current law baseline. That would mean that it would still add about 200 B in revenue to the Treasury when evaluated at the current policy baseline, which includes all the business tax extenders that are extended every year before lapsing.

    Calling it revenue neutral is merely a political statement, not a policy one in that context – the Geithner/Obama proposal would add revenue relative to the current policy baseline, same as the recent Bush tax cut deal adds relative to current policy but is a tax cut relative to current law.