Is Corporate Tax Reform Realistic?

By :: May 19th, 2011

This morning, a panel of veteran international tax experts tried to put the U.S. struggle to fix its corporate tax system in broader perspective. Unfortunately, they concluded that the U.S. is lagging well behind the rest of the world in corporate reform and, worse, the odds of any serious progress anytime soon are slim.

The group spoke to the National Tax Association’s annual conference here in Washington. Jeffrey Owens of the OECD, Jack Mintz of the University of Calgary, Barbara Angus of the accounting firm Ernst & Young, and William Morris of General Electric came to the panel with quite different perspectives. Mintz has advised the Canadian government in its successful efforts to lower rates and eliminate tax preferences. Morris discussed the U.K.’s ongoing—and so far less successful—attempts to do the same. Angus talked about where the U.S. stands, and Owens provided a broad multi-national view.

As we await possible reform plans from both the Obama Administration and the House Ways & Means Committee, this panel put some interesting ideas on the table. Among them:

  1. Mintz argued that Canada did not lose a lot of revenue by lowering its very high corporate rate, and suggested the U.S. would not either.  He said companies can both easily shift profits to other jurisdictions and take advantage of tax preferences when faced with very high rates. As rates are cut, firms are less likely to manipulate income. His view is more than a little controversial. Among others, Jane Gravelle of the Congressional Research Service has found that a significant cut in U.S. rates would lose substantial tax revenue.
  2. Canada succeeded in cutting rates and broadening its corporate tax base thanks to a strong political consensus that formed behind the issue. Corporate rate cutting had the support of liberal provincial governments as well as a conservative national government.  We are far from such a consensus here.
  3. GE’s Morris, whose firm is enormously successful at keeping its tax bill low, said that firms might not object to a proposal that would end their ability to defer paying domestic  tax on foreign income until those profits are returned to the U.S.  However, he suggested they’d give up that benefit only if the corporate rate were low enough (he did not define “low.”).  
  4. Unlike smaller countries, the U.S. might be able to get away with high tax rates given the many other advantages firms have doing business here. However, it may see a steady erosion in the quality of investment.
  5. Stand-alone corporate reform is unlikely in the U.S., although it has succeeded elsewhere. Angus, the most optimistic of the group, urged broad-based business reform that includes “pass-through” firms whose income is reported on the tax returns of their individual owners. But Owens and Mintz felt it would be far more productive for the U.S. to pursue reforms that go far beyond business taxes.       

6Comments

  1. Sid F  ::  9:59 pm on May 19th, 2011:

    Doesn’t the post by Mr. Burman two posts down really answer your title question?

  2. Michael Bindner  ::  10:36 am on May 20th, 2011:

    Corporate tax rate reform should probably go hand in hand with personal and payroll tax reform or reduction. The biggest base broadener is to turn the Corporate income (really profits) tax into a Net Business Receipts Tax by ending the deductibility of labor costs and expanding filing to all businesses, not just corporations.

    There could a surtax for higher salaried employees and investors – although that brings up a reporting problem most conveniently solved by preserving an income surtax on the highest earners. This prevents the taxation of lower income investors and preserves the privacy of people who have independent income – who might be unemployable if doing so requires payment of a higher tax on their behalf.

    Such a reform should also have a VAT portion, so that the public is conscious of taxation at every level.

    Finally, the VAT should be zero rated at the border, but not the NBRT so that the NBRT can continue to have deductions for things like health care.

    I would expand the range of deductions and credits for health care for workers, their families and retirees, with robust mental health care provisions (to replace incarceration of the mentally ill and addicted) as well as educational benefits at the state and federal levels for children and for new hires (with college students hired before junior year and their employers picking up the tab in exchange for tax benefits and a service commitment – which would be replaced by a marketable loan if the employment did not work out).

    Most importantly, the child tax credit would shift to the NBRT from income taxation. Because of these tax payments, the NBRT would not be zero rated for exports, since the importing country benefits from services to employees and their families in a way that they don’t benefit from services provided to taxpayers through a VAT.

  3. Carl  ::  1:00 pm on May 20th, 2011:

    Set the corporate rate down to about 20% or so and treat dividends and capital gains on the sale of corporations as ordinary income and you have a rough wash on total tax rates for rich corporate founders. Those who founded corporations and have paid lots of corporate tax in the past get a tax hike. Small investors, such as retirees and retirement plan investors get a tax cut.

    In the process we get a major simplification, and get rid of a giant loophole for hedge fund owners and others who manage to make their income look like capital gains.

  4. Michael Bindner  ::  3:24 pm on May 20th, 2011:

    Set it to 28% and treat dividends and gains as normal income and you get the increase required to bring the budget more into balance, especially if you end the deductibity of labor (and end personal income tax filing more most families).

  5. Ralph H  ::  12:22 pm on May 21st, 2011:

    We must change our Corporate tax system. We need to do it to ensure we have growth, which can only come from the private sector. Keep in mind that gathering tax from the corporate sector is less important than maximizing the number of people working — who pay taxes. Our current tax structure is very good at extracting money from traditional retail and manufacturing business, but awful in collecting from international service companies (Google). As we evolve toward a more educated service economy we need to change how business taxes are applied so that they are fairly applied. A benefit of this would be making US companies in basic industries more competitive, and reducing our unemployed. This might mean a VAT or gross revenue type tax in lieu of a profit tax, and we must figure how to tax the finacial services industry. The alternative is to increase personal tax rates and eliminate most corporate taxes (hardly a popular choice).

  6. Mat G  ::  3:00 pm on May 23rd, 2011:

    All the tax plans in the world can not get by a broken Senate that can not pass anything.I would start with the 800 pound gorilla and boycot Exxon/Mobil until thier lobbyist that run the goverment, put a lower tax rate rate without loop holes in place.