Corporate tax reform is trickier than you think
I thought this on corporate tax reform by Robert Pozen in this AMs WaPo takes a clear-eyed look at the issue.
I think it was Yogi Berra who said, 鈥淣obody goes there anymore鈥t鈥檚 too crowded.鈥�
Advocates of corporate tax reform make a similar point: the US tax rate on corporations is too damn high鈥nd nobody pays it. That second point references all the special carve outs, loopholes, and favorable treatment that we provide to various corporations, based on everything from boosting desired activities to the skill of their lobbyists. There鈥檚 something like a 10 percentage point difference between the 35% rate on the books and the 25% or so effective rate (their actual tax liability share of their income).
In terms of reform, that鈥檚 actually not bad news, because it means there鈥檚 a lot of income in the 鈥渂ase鈥� that could (and should) be brought back into the system to offset a lower rate.
That 鈥渙ffset a lower rate鈥� part is important. As I鈥檝e stressed every time someone around these parts talks about tax reform, if we want to maintain any hope of generating enough revenues for a functioning Federal gov鈥檛, it鈥檚 got to be revenue neutral (actually, as I note below that may be too low a bar).
When we鈥檙e talking about corporate tax reform, that鈥檚 where things get sticky. As Pozen points out, some of the largest tax expenditures favor manufacturers (accelerated depreciation, manufacturing production credit) along with multinationals who defer paying US taxes on hundreds of billions of foreign earnings.
It鈥檚 the Willie Sutton problem: you go where the money is. That鈥檚 where corporate tax reform would have to raise revenues, and that means:
鈥揹urable manufacturers (heavy industry) would see their rates go up;
鈥揻inancials (which don鈥檛 benefit much from depreciating equipment) would see their rates go down;
鈥搚ou鈥檇 have to tax those deferred earnings.
The latter would be a deal-breaker for the corporate community with overseas profits鈥攖hese are the folks pushing for a repatriation tax holiday, so they can remit those foreign liabilities at a much reduced rate (a lousy idea, as I鈥檝e written ). But in order to raise what we would need to support a lower rate, revenue neutrality would have to go the other way on this, taxing foreign earnings at their current rate. (A related aspect of corporate reform is the move to a 鈥渢erritorial鈥� tax system for multinationals鈥his too is tricky鈥搒ee the last bullet .)
And raising taxes on factories while lowering them on investment banks doesn鈥檛 quite sound like the right place to take tax policy right now, if you know what I mean鈥�
One final point. We can鈥檛 achieve a sustainable budget path without new revenues鈥攕pending cuts alone won鈥檛 do it. 鈥淩evenue neutral鈥� corporate reform thus sets a low bar, and it puts all the emphasis for new revenue on the individual side of the tax code. In that regard, I like this argument by the Citizens for Tax Justice, calling for revenue-positive corporate tax reform鈥ust sayin.鈥�
