Corporate Tax Reform: Be Careful What You Wish For

A new post from former Vice Presidential economist Jared Bernstein on recent proposals for corporate tax reform:

Pretty much every discussion of tax reform these days ends with an agreement that we need to broaden the base and lower the rates.  Well, the White House today will release the broad outlines of a plan to do just that on the corporate side of the federal tax code.

According to advance info from this AMs NYT, the proposal will be to cut the current top corporate rate of 35% down to 28%, and to close a bunch of loopholes to make up the difference.   Some other features include:

–a lower rate—25%–for manufacturers;

–a minimum tax rate on foreign earnings to discourage tax sheltering by multinationals;

–added incentives for R&D (probably making that tax credit permanent, something the admin has long supported) and clean energy investments;

–a bunch of other loophole closures…

And therein lies the rub.  It is widely recognized that many corporations already pay far less than the statutory rate–from the WaPo story on the proposal:

Today, the U.S. corporate tax rate of 35 percent is one of the highest in the world, but an abundance of loopholes and deductions means that many companies pay far less than that — or nothing at all. Companies in the United States pay almost half the taxes than companies do in other rich countries, compared to the size of the economy, according to the Organization for Economic Cooperation and Development.

Last I checked, we were collecting around 1.3% of GDP in revenue from the corporate sector.  That’s low both in our own historical terms (the average has been about 2% over the past few decades) and especially in international terms, despite the fact that we have a higher statutory rate.  And it’s not just the recession depressing corp revenues, though that’s part of it, because corporate profitability is once again soaring.

This tells you two things.  First, a lot of companies take advantage of the breaks in the code and second, getting to a revenue-neutral 28% will mean taking away a lot of those goodies.