Corporate tax reform is trickier than you think

Why changing the way corporations pay taxes is more difficult than it seems.

I thought this piece 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, “Nobody goes there anymore…it’s too crowded.”

Advocates of corporate tax reform make a similar point: the US tax rate on corporations is too damn high…and 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’s 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’s actually not bad news, because it means there’s a lot of income in the “base” that could (and should) be brought back into the system to offset a lower rate.

That “offset a lower rate” part is important. As I’ve 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’t, it’s got to be revenue neutral (actually, as I note below that may be too low a bar).

When we’re talking about corporate tax reform, that’s 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’s the Willie Sutton problem: you go where the money is. That’s where corporate tax reform would have to raise revenues, and that means:

–durable manufacturers (heavy industry) would see their rates go up;

–financials (which don’t benefit much from depreciating equipment) would see their rates go down;

–you’d have to tax those deferred earnings.

The latter would be a deal-breaker for the corporate community with overseas profits—these 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’ve written before). 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 “territorial” tax system for multinationals…this too is tricky–see the last bullet here.)

And raising taxes on factories while lowering them on investment banks doesn’t quite sound like the right place to take tax policy right now, if you know what I mean…

One final point. We can’t achieve a sustainable budget path without new revenues—spending cuts alone won’t do it. “Revenue neutral” 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 here by the Citizens for Tax Justice, calling for revenue-positive corporate tax reform…just sayin.’