The potential impact of corporate tax reform

THE POTENTIAL IMPACT OF CORPORATE TAX REFORM…. In his State of the Union address a couple of weeks ago, President Obama actually got some Republican applause by raising the specter of lowering the corporate tax rate. “[O]ver the years,” he noted, “a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.”

The president emphasized this again yesterday to the U.S. Chamber of Commerce, noting “a burdensome corporate tax code with one of the highest rates in the world.” Noting the negative impact of the status quo, Obama argued, “We need something smarter, something simpler, something fairer.”

All of this sounds rather appealing to the right, but some conservatives may not fully appreciate the point the president is making here. The structure of corporate taxes in the U.S. is a mess — we have high rates, but collect less revenue because the code is filled with enough holes to resemble Swiss cheese. When Obama talks about lowering high tax rates from the existing 35% rate, he’s also talking about getting some corporations to start paying the taxes they’re avoiding now.

The NYT‘s David Leonhardt had a good piece the other day, noting not only the loophole-ridden status quo, but also the fact that the system isn’t actually generating the revenue for the treasury it’s supposed to.

Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.

Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.

“A dirty little secret,” Richard Clarida, a Columbia University economist and former official in the Treasury Department under President George W. Bush, has said, “is that the corporate income tax used to raise a fair amount of revenue.”

Over the last five years, on the other hand, Boeing paid a total tax rate of just 4.5 percent, according to Capital IQ. Southwest Airlines paid 6.3 percent. And the list goes on: Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.

Remember, when Republicans complain bitterly about the existing 35% corporate rate, they’re assuming businesses are actually paying it. That’s clearly not the case.

The politics of this is trickier than it should be. The White House and congressional Republicans agree that reform is worthwhile, but those loopholes that lower corporate tax burdens are pretty popular for obvious reasons — powerful businesses are paying a small fraction of what they’re supposed to pay, and they’re going to hire a legion of lobbyists to keep those loopholes in place.

Indeed, the Business Roundtable supports corporate tax reform, but only lowering the rate — not closing the loopholes. This, in turn, would make a massive deficit even worse.

A more effective, coherent tax structure would make sense for businesses — which are “ending up making decisions based on what their tax director says instead of what their engineer designs or what their factories produce” — and be fairer for everyone. But expect a spirited fight over this, with corporate lobbyists and the GOP members they keep on speed dial rediscovering their fondness for the status quo.