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Slash corporate tax rates? Let's start with ending the business breaks Slash corporate tax rates? Let's start with ending the business breaks
(6 months later)
Corporate tax reform could help address two major public policy challenges: unsustainable long-term budget deficits and a tax code that lets corporations avoid taxes and encourages them to invest in ventures that receive the biggest tax breaks, rather than those that can make the economy more productive. Reducing or eliminating the tax breaks that litter the corporate tax code could cut the deficit, reduce tax avoidance, and allow for more productive investments. But poor reforms could set the US back even further.Corporate tax reform could help address two major public policy challenges: unsustainable long-term budget deficits and a tax code that lets corporations avoid taxes and encourages them to invest in ventures that receive the biggest tax breaks, rather than those that can make the economy more productive. Reducing or eliminating the tax breaks that litter the corporate tax code could cut the deficit, reduce tax avoidance, and allow for more productive investments. But poor reforms could set the US back even further.
The tax code – including corporate taxes – should contribute to deficit reduction. Keep in mind that corporate tax revenues as a share of the economy are at historical lows, and they are low compared to other developed countries. Although the top corporate rate is high, the average tax rate – that is, the share of profits that companies actually pay – is substantially lower because corporations use the tax code's many preferences to reduce their government bill.The tax code – including corporate taxes – should contribute to deficit reduction. Keep in mind that corporate tax revenues as a share of the economy are at historical lows, and they are low compared to other developed countries. Although the top corporate rate is high, the average tax rate – that is, the share of profits that companies actually pay – is substantially lower because corporations use the tax code's many preferences to reduce their government bill.
As corporate lobbyists advocate for slashing corporate tax rates, policy-makers should keep deficits firmly in sight. They should not promise a massive corporate tax cut before considering how unaffordable it may be.As corporate lobbyists advocate for slashing corporate tax rates, policy-makers should keep deficits firmly in sight. They should not promise a massive corporate tax cut before considering how unaffordable it may be.
Congress' tax scorekeeper, the Joint Committee on Taxation (JCT), calculated how low the corporate rate could go under a revenue-neutral reform that eliminated nearly all major corporate tax breaks. The answer (pdf): 28%, well above the 25% for which many lobbyists advocate. But even the 28% figure may be unrealistic in practice.Congress' tax scorekeeper, the Joint Committee on Taxation (JCT), calculated how low the corporate rate could go under a revenue-neutral reform that eliminated nearly all major corporate tax breaks. The answer (pdf): 28%, well above the 25% for which many lobbyists advocate. But even the 28% figure may be unrealistic in practice.
First, it relies on the dubious assumption that Congress would eliminate nearly all of the corporate tax breaks, including, for example, tax credits to encourage production in the United States and research and development activities, many of which have strong support among lawmakers. Second, the JCT analysis notes that a 28% top corporate rate would increase deficits after 10 years, even assuming aggressive base-broadening. That's because many possible changes to the tax code would save more in the first ten years than in later decades.First, it relies on the dubious assumption that Congress would eliminate nearly all of the corporate tax breaks, including, for example, tax credits to encourage production in the United States and research and development activities, many of which have strong support among lawmakers. Second, the JCT analysis notes that a 28% top corporate rate would increase deficits after 10 years, even assuming aggressive base-broadening. That's because many possible changes to the tax code would save more in the first ten years than in later decades.
For example, eliminating accelerated depreciation, which allows firms to deduct the cost of new investments at an accelerated rate, alone would pay for 53% of the ten-year cost of dropping the rate to 28%, JCT estimates. But JCT also found that the revenue gained by repealing this tax break peaks in 2017 and then falls sharply. That means that the package of base-broadening and a 28% rate would add to the deficit over the long run.For example, eliminating accelerated depreciation, which allows firms to deduct the cost of new investments at an accelerated rate, alone would pay for 53% of the ten-year cost of dropping the rate to 28%, JCT estimates. But JCT also found that the revenue gained by repealing this tax break peaks in 2017 and then falls sharply. That means that the package of base-broadening and a 28% rate would add to the deficit over the long run.
Given that the deficit problem is fundamentally long-term in nature, it's crucial to avoid policies that worsen the long-run outlook. Policy-makers must avoid the trap of promising a low corporate tax rate that's so costly that corporate tax reform wouldn't reduce the deficit – and might even add to it.Given that the deficit problem is fundamentally long-term in nature, it's crucial to avoid policies that worsen the long-run outlook. Policy-makers must avoid the trap of promising a low corporate tax rate that's so costly that corporate tax reform wouldn't reduce the deficit – and might even add to it.
The risks of reform are acute when it comes to taxing multinational corporations. Many large US-based multinational companies are lobbying for corporate tax reform to include a "territorial" tax system, under which they would face a zero or very-low tax rate on their foreign profits. A territorial tax system would increase rather than reduce current incentives for US-based multinationals to shift their operations from the United States to low-tax countries or "tax havens", or to artificially shift their profits there using what are known as "earnings stripping" techniques. That risks draining revenues from the corporate income tax and would actually increase deficits.The risks of reform are acute when it comes to taxing multinational corporations. Many large US-based multinational companies are lobbying for corporate tax reform to include a "territorial" tax system, under which they would face a zero or very-low tax rate on their foreign profits. A territorial tax system would increase rather than reduce current incentives for US-based multinationals to shift their operations from the United States to low-tax countries or "tax havens", or to artificially shift their profits there using what are known as "earnings stripping" techniques. That risks draining revenues from the corporate income tax and would actually increase deficits.
Corporate lobbyists argue the US could impose a "tough" territorial tax system by including strict rules to prevent earnings stripping. But the experience of the UK and many other developed countries that already have "tough" territorial tax systems is not promising. As the Guardian has recently covered extensively, multinationals are circumventing those structures, shifting profits to tax havens and paying very little tax in any country. Policy-makers are increasingly frustrated by multinationals – including US-based corporations such as Starbucks, Google, and Apple – that do billions in UK business but pay very little in UK tax.Corporate lobbyists argue the US could impose a "tough" territorial tax system by including strict rules to prevent earnings stripping. But the experience of the UK and many other developed countries that already have "tough" territorial tax systems is not promising. As the Guardian has recently covered extensively, multinationals are circumventing those structures, shifting profits to tax havens and paying very little tax in any country. Policy-makers are increasingly frustrated by multinationals – including US-based corporations such as Starbucks, Google, and Apple – that do billions in UK business but pay very little in UK tax.
Given the problems that other countries are having with even "tough" territorial systems, the United States should, instead, focus its corporate tax reform efforts on eliminating tax breaks that distort investment decisions, reducing incentives for multinationals to avoid taxes, and directing much-needed revenues toward deficit reduction.Given the problems that other countries are having with even "tough" territorial systems, the United States should, instead, focus its corporate tax reform efforts on eliminating tax breaks that distort investment decisions, reducing incentives for multinationals to avoid taxes, and directing much-needed revenues toward deficit reduction.
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