What Should Corporate Tax Reform Look Like?

March 1, 2011 at 11:34 am

With Congress likely to consider corporate tax reform this year, we’ve issued a report outlining the tests that a well-designed reform proposal should meet:

  1. Contribute to long-term deficit reduction. Corporate tax revenues are now at historical lows as a share of the economy (see graph), at a time when the nation faces deficits and debt that are expected to grow to unsustainable levels.  Although the top statutory corporate tax rate is high, the average tax rate — that is, the share of profits that companies actually pay in taxes — is substantially lower because of the tax code’s many preferences (deductions, credits and other write-offs that corporations can take to reduce their taxes).  Moreover, when measured as a share of the economy, U.S. corporate tax receipts are actually low compared to other developed countries.  All parts of the budget and the tax code, including corporate taxes, should contribute to deficit reduction.  Well-designed corporate tax reform can improve economic efficiency and help on the deficit-reduction front at the same time.
  2. Reduce the tax code’s bias towards debt financing. The current corporate tax code encourages corporations to finance their investments with debt (e.g., by issuing bonds) rather than equity (e.g., by selling stock).  This encourages corporations to rely excessively on debt, which, as the recent financial crisis demonstrated, poses risks for both the firms and the broader economy.  The tax code should be more even-handed in treating these two types of financing.
  3. Reduce the tax code’s bias toward overseas investments. U.S. multinationals pay much lower taxes on profits from their overseas investments than on profits from their domestic investments.  That gives corporations a strong incentive to shift economic activity and income from the United States to other countries.  Policymakers should address the features of the corporate tax code that allow so much business activity to escape taxation and that favor foreign investments over domestic ones.
  4. Improve economic efficiency by reducing special preferences. The corporate tax code taxes different kinds of corporate investments at very different rates.  This “unlevel playing field” encourages businesses to choose among investments in substantial part based on their tax benefits, instead of making those decisions based entirely on investments’ real economic value.  Policymakers should level the playing field through corporate tax reform.
  5. Provide more neutral treatment of corporate and non-corporate businesses. Over time, various policy changes have made it easier for companies to enjoy the benefits of corporate status without being subject to the corporate income tax.  Reform should reflect the guiding principle that firms engaging in similar activities and enjoying similar legal benefits should be taxed at similar rates.
  6. Take specific steps to discourage tax sheltering. If policymakers lower thestatutory corporate tax rate to well below the top individual tax rate, they should also establish safeguards to prevent high-income individuals from sheltering their income in corporations in order to pay taxes at a lower rate.

Click here for the full report.

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More About Chuck Marr

Chuck Marr

Chuck Marr is the Director of Federal Tax Policy at the Center on Budget and Policy Priorities.

Full bio | Blog Archive | Research archive at CBPP.org

10 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. ballerina #

    It is long past time for corporations to pay their fair share of taxes. I agree with the writer – eliminate all corporate tax loopholes/tax sheltering schemes, disincentivize shifting corporate income overseas, and level the playing field on corporate and non-corporate business income. Progressives have to change the dialogue from “no tax increases ever” to “paying your fair share of taxes is patriotic, and trying to avoid paying taxes is unpatriotic.”

  2. Donna #

    I am against buying from any company that does not support this country and the people in it. If they do not want to pay tax, fine, do not let their products in this country. There is a SOCIAL CONTRACT. The people and taxes pay for the infrastructure that covers all the social services. Roads, Police, Firemen, Education and should cover healthcare. At the current, the shareholder gains the profits instead of the people that made it possible. Social unrest will occur until this is corrected. We do not want the whole pie, just a sustainable piece of it. I am mad as hell at the grabbers and the greedy. They will come down.

  3. Basilsic #

    On your point #3, is the bias because of “the tax code”, or is it because of the fact that foreign corporate tax rates tend to be lower than the US rate? US corporations abroad, like any business anywhere, have to pay taxes to the country where they’re based. If I’m not mistaken, like US citizens abroad they can then credit these taxes against their US tax bill. This makes their US tax payments seem low – but, in fact, their overall tax bill (ie US and foreign) is the same as, or greater than, what they would pay if the same income were earned in the US. Certainly my experience working abroad and filing US income taxes is that the foreign tax credit formula is designed to make one’s overall tax bill at least as great as it would be on US-only income, and often greater. But I honestly don’t know much about corporate taxes – is it also the case for corporates?

    • liberal #

      The problem with this argument is that corporations spend a lot of argument shifting income in order to minimize their worldwide taxes.

  4. 5

    Admirable those these suggestions are, how could they *not* be perceived and attacked as tax increases? Because, after all, that’s what they are: increasing the amount of taxes taken from corporations.

    Unless you can come up with a political — or even just rhetorical — solution to the problem of “how to argue for raising taxes”, your proposal is thoughtful, well-intentioned, and meaningless.

    • My2Cents #

      Why should people, especially those like corporations who have more than enough money to spare, be against tax increases at a time when the country is so cash strapped? Wanting all your federal services but not wanting to pay for them is just selfish.

      • 7

        In the first place, you will observe that people *are* selfish, and that “no tax increases, ever” is an extremely powerful motto in American politics.

        In the second place, corporations are particularly selfish, because they are not people. The way most corporate management interprets their duties, they are contractually obliged to be as selfish as possible, i.e. to make as much profit as possible.

        • Saladinho #

          Well, since corporations are not people, then they won’t get their feelings hurt when they’re obliged to pay their fair share of taxes. Whether people are selfish or not, it’s the governments job to act in the best interests of the country, not just give up in the face of human–or nonhuman–failings.

    • polysciguy #

      Here’s the rhetorical argument. If the corporate tax rate is 15% of capital gains, then they should pay 15%. Close the loopholes. That’s not raising taxes. The law is that they should pay 15% so why are we letting the break the law via technicality?

  5. 10

    You chart reflects how horrible the Corporate Tax code is. There are so many corporate moves to avoid taxes and inefficiencies as a result, that the US Government may ray more revenue by totally eliminating it.

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