Myths and Facts About Corporate Taxes, Part 2: Will Congress’s Idea of “Base-Broadening, Rate-Lowering Tax Reform” Fix What’s Wrong With Our Corporate Tax Code?

A few weeks back, we examined whether the conventional wisdom that the U.S. has the highest corporate tax rate in the world is indeed true. (Hint: No.) Now let’s take another look at what’s become another “truism” about taxes in Washingtonese: that “fundamental corporate tax reform” would be both desirable policy and achievable politics.

(Hint 2: Still no.)

When politicians (of both parties) talk about “corporate tax reform,” what they tend to mean is ridding the code of many exemptions, deductions, credits, and loopholes, and then lowering the top rate to maintain revenue neutrality. For example, see these nearly identical quotes from Speaker Boehner (“Let’s grow the economy and create jobs and broaden the tax base and lower rates”) and President Obama (“By broadening the base, we can actually lower rates to encourage more companies to hire here”).

The public policy argument against this kind of tax reform is simple: The idea that we should reform the tax code but not get any additional revenue out of it is simply absurd. Additional federal revenue is sorely needed, both to finance infrastructure investment and public-sector jobs in the short- and medium-term, but also to continue to pay for our social safety net (which is quite modest, by international standards) in the long-term. Our corporate tax code has features that make it an excellent source of such revenue. First, the incidence of the corporate tax is very progressive: The lowest fifth of earners pay about 0.9 percent of their income in corporate income tax, while the top 0.1 percent of earners pay 9.7 percent. And second, after-tax corporate profits are at an all-time high. The code also has a bug that, if fixed, could help produce additional progressive revenue: Many large American multinationals take advantage of the myriad loopholes, deductions, exemptions, and whatnots in the code so as to pay little or no federal taxes.

Revenue-neutral reform, moreover, would be hard-pressed to bring down the top rate dramatically. For example, GOP House Ways and Means Committee Chairman Dave Camp was only able to bring it down to 25 percent in his Republican reform proposal, and it would be even more difficult to bring down the top rate enough to be “competitive” with the U.K.’s 20 percent. So if the aim of reform is to bring down the statutory rate to match the rates of other developed countries, it would be extraordinarily difficult to do so without losing revenue.

Finally, there is the policy dilemma of determining which revenue level serves as the baseline for achieving revenue neutrality. One reason for congressional Republicans not to get behind one-off pieces of tax legislation that would raise revenue (such as clamping down on corporate tax inversions) is to make sure the baseline to which they could adhere during a tax reform discussion would include as little revenue as possible. This same logic is behind Republicans’ move to make various corporate “tax extenders”—tax breaks that are routinely passed on a temporary basis—permanent. As CBPP puts it, “If policymakers make the extenders permanent in advance of tax reform, a future tax reform plan would no longer have to offset the extenders’ cost to achieve revenue neutrality (much less meet the more appropriate goal of raising revenue to reduce deficits).”

Republicans in Congress seem to be having such a tough time setting an optimal baseline for themselves (i.e., one that would allow “revenue neutral” tax reform to raise as little revenue as possible) that they have lately resorted to turning up the volume on their call for “dynamic scoring.” This switch would mandate that the official budget scorekeeper show that tax cuts help pay for themselves by boosting economic output, even though the science on such projections is dubious and even as the same rules would not apply to the spending side of the government’s ledger.

In addition to being unwise public policy, tax reform that follows this broaden-the-base, lower-the-rates, remain-revenue-neutral template would face an enormous political problem: By definition, this kind of reform would increase the effective tax rates of American firms that now receive outsized benefits from the various exemptions and deductions that would be eliminated, even as their statutory rate decreased. (The zero-sum game of revenue-neutral tax reform would pit various business interests—key Republican constituencies—against one another, which explains the Republican leadership’s outright dismissal of Chairman Camp’s tax reform plan.)

Though one could argue that it’s fairer and more economically efficient to have firms across industries pay more similar tax rates, the sort of revenue-neutral, broaden-the-base, lower-the-rates reform that politicians tout would do very little to address the “anti-competiveness” non-problem they cite. Moreover, corporations that benefit from loopholes that would be on the chopping block would scream bloody murder.

In short, this kind of reform doesn’t even solve a made-up problem, and the firms that such legislation would be designed to benefit wouldn’t even like it.