Thinking about corporate tax reform

If there is one thing everyone agrees on in Washington, it’s that corporate tax reform is urgent. Art Laffer, Reagan’s former economic advisor, even said that “every single candidate is serious about doing it.” Unfortunately, they’re not serious enough. They need to actually agree on the details.

I. Why we need corporate tax reform

The highest corporate tax rate in the developed world is in the United States, making the U.S. unappealing for tax reasons. Since businesses aren’t stupid, they typically respond by exploiting loopholes and subsidies to avoid paying their taxes, move profitable operations overseas for lower tax rates, or do both.

As a result, the U.S. barely collects its corporate taxes. Armies of lawyers and accountants help corporations avoid the high U.S. tax; many companies have lawyered their tax rate down to zero. (If you’re interested in what companies are actually paying, check out the chart here.)

The losses are real – it’s why Burger King just moved to Canada. The system is failing, and Republicans and Democrats both know it.

II. Why the rate needs to go down

Despite what Bernie Sanders tells you, raising the corporate tax rate is not progressive and it would actually hurt the middle class.

Corporations pay their taxes by cutting salaries. Increasing the corporate tax rate basically just lowers everyone’s salary and encourages businesses to relocate overseas. Make it easy for businesses to make profits in the U.S., and the middle class grows stronger.

Eliminating the corporate tax would encourage businesses to invest in the U.S. and it would only affect about 2% of GDP, or $300 billion. Plus there are ways to fill the gap.

Here’s the rub –

III. You can’t just cut the corporate tax rate. You have to close loopholes too.

Cutting the corporate tax rate punches a $300 billion hole in the budget, raising the deficit 54 percent. Since no one wants that, we need to plug the gap somewhere else. This is called the “revenue neutral” solution and we’re nearly at the point where we start cursing Congress.

To plug the gap, lawmakers could slightly raise personal income tax rates, or they could shift the tax to the owners by raising the tax on capital gains. This makes it more expensive to be a shareholder, but it protects employee salaries. They could also cut loopholes and subsidies. (If you’re looking for a fantastic list of easy-to-kill subsidies, read this article.)

IV. Why would anyone even want a corporate tax rate?

Maybe it’s because some people like to think they’re sticking it to the man with high tax rates. But those people are sadly mistaken.

Complicated taxes benefit large companies in many ways. First, finding tax loopholes makes large corporations more competitive against upstart entrepreneurs who pay full tax. Second, it’s hard for the IRS to collect taxes from a corporate attorney army – an advantage small businesses lack.

Of course, lobbyists don’t want the tax to end either. Their knowledge of loopholes is valuable and lucrative.

VI. The Democrat version of events.

[trigger warning: one-sided view. –ed.]

Both the Democrats and Republicans, by and large, think our corporate tax rate is too high, and both agree on lowering it. Let’s start with a quote from The Fiscal Times:

“In my opinion, anyone who talks about tax reform without being willing to support tax neutrality and eliminate unjustified provisions from the tax code should be ignored.”

Obama wants to close loopholes in addition to lowering the rate to 28 percent, and Republicans just want to lower the rate without closing loopholes. In the 1980s, Ronald Reagan knew that loopholes needed to be closed in addition to lowering the tax rate, so what’s the problem with today’s Republicans?

Republicans have pinned Obama in a trap: Republicans will support cuts to the corporate tax rate along with the Democrats, but they’ll make the Democrats close the loopholes. Then they can say that they favored a tax cut, but the Democrats wanted to raise taxes.

VII. The Republican version of events.

[trigger warning: one-sided view. –ed.]

Both the Democrats and Republicans, by and large, think our corporate tax rate is too high, and both agree on lowering it. Let’s start with a quote from Charles Krauthammer:

“So why not attack the inversion problem with its obvious solution: tax reform? [Obama] wants legislation to outlaw inversion…One of the reasons for the recent acceleration of inversions is that corporations want to move before Obama outlaws it”

Republicans also want to close loopholes, but oppose Obama’s proposal to outlaw inversions. It creates a hostile business climate that’s hard to enforce, is easy to escape and gives the government more power. It’s better to create a positive corporate climate than attack inversions in the courts.

VIII. Wrapping up

To increase jobs and wages for the middle class, cut the corporate tax rate – cut it as low as politically possible. Pay for it by closing loopholes or raising taxes; there is no other option. Make a hospitable climate for corporations to bring profits here and don’t outlaw inversions as the U.S. can’t even collect its taxes as it is right now

Democrats need to stop whining about “immoral corporations” and Republicans need to stop laying traps and both sides need to acknowledge the reality: That doing the best thing for the middle class is politically nasty. It involves cutting taxes to corporations, raising taxes on ordinary Joe and fighting entrenched corporate interests.

IX. Judging success

All these actions are politically awful, but they’re worth it if they create jobs and bring employers back. With that in mind, success is measured by:

  • Proving that tax increases and corporate tax cuts were “revenue neutral;”
  • Proving job growth and increased revenue from lowering the corporate tax rate.

X. Positions of the candidates (and some others, too)

[Disclaimer: this is the best I could find.]

  • Bernie Sanders – Favors raising corporate taxes. Denies that the U.S. corporate tax high rate is the highest among developed countries. Wants to increase corporate tax rate. Wants to tax overseas corporate profits the same.
  • Hilary Clinton – wants to increase capital gains rate in short-term; unsure of her position on the corporate tax rate.
  • Joe Biden – believes in lowering the overall corporate tax rate, closing loopholes and ending reductions.
  • Elizabeth Warren – supports increasing the corporate tax.
  • President Obama – proposes cutting corporate tax rate to 28%, 25% for manufacturers, closing loopholes and outlawing inversion with legislation.
  • Ted Cruz – supports cutting the corporate tax rate to 15% immediately
  • Marco Rubio – wants to eliminate capital gains taxes; wants to cut the corporate tax rate;
  • Donald Trump – favors repealing the corporate tax rate.
  • Jeb Bush – Proposes cutting corporate tax rate down to 20%
  • Rick Santorum – wants to reduce the corporate tax rate to 17.5% and eliminate it for manufacturers
  • Scott Walker – supports a reduction in capital gains taxes

XI. Very interesting articles

These articles were particularly helpful.

  • An excellent article on the characteristics of an effective tax system.
  • The best summary of the current Congressional impasse. Names several loopholes that could be cut immediately.
  • A graphic that shows the United States’ ineffectiveness at collecting corporate taxes.

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