Martin Sullivan, Daniel Shaviro and Laura Tyson debate the future of corporate tax reform. Preetisha Sen / Medill
WASHINGTON – President Barack Obama mentioned the need for corporate tax reform in his January State of the Union address. Now the Republican chairman of the powerful House Ways and Means Committee is offering a comprehensive tax reform plan that covers both individual and corporate taxes.
House Ways and Means Committee Chairman Dave Camp, R-Mich., released draft legislation for the Tax Reform Act of 2014 Wednesday. It includes several proposed reforms for individual taxes, but also addresses problems with the corporate tax code.
“Canada has already reformed its tax laws and Mexico is doing so right now,” Camp wrote in an op-ed published in the Wall Street Journal Tuesday. “If Congress doesn’t take action, the U.S. risks falling further behind.”
Camp’s new proposal would flatten the tax code for both individuals and corporations, setting a maximum rate of 25 percent for both, Corporate tax rates now average 35 percent. It also would modernize the international tax code.
Obama has also pushed for corporate tax reform. In his State of the Union address, he advocated for corporate tax reforms like making tax rates more manageable for small businesses and introducing a tax on foreign profits.
“Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes,” the president said. “Let’s flip that equation. Let’s work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.”
Two major issues to be addressed: U.S. corporate tax rates are some of the highest in the world and U.S. companies’ foreign profits can remain untaxed unless brought back to the United States.
While Camp has started to take action, the loss of a key Senate champion of tax reform could pose problems. Former Sen. Max Baucus, who was chairman of the Senate Finance Committee, recently became U.S. ambassador to China. His replacement as head of Finance, Sen. Ron Wyden, D-Ore., said he plans to work with the committee “to find the right paths forward on reforming the tax code.”
Camp’s bill would reduce the corporate rate to 25 percent and also cut individual into two brackets of 10 and 25 percent, without increasing the budget deficit. However, the bill does not address the lack of taxes on foreign profits, which Obama and other Democrats have advocated for.
The stalemate with tax rates
The last major legislation to change the tax structure was the Tax Reform Act of 1986, which was passed under President Ronald Reagan and largely focused on creating the personal income tax brackets in use today. It also set corporate tax rates and included a loophole for foreign profits, which many companies use by keeping their profits offshores.
American corporate tax rates vary from 15 to 39.2 percent depending on company size, which is the second highest federal-state corporate tax rate in the world, falling just short of Japan’s 40 percent rate. The most common rate for U.S. corporations is 35 percent – 10 points higher than the average rate for countries in the Organization of Economic Cooperation and Development, a global economic progress group.
Daniel Shaviro, a professor of law at New York University, said changing this law will be difficult given the partisan rancor between the Republican-controlled House and the president.
“2014 is not 1986. Once the thing got going, none of the politicians wanted to kill it. Maybe something could happen, but I’m not holding my breath” Shaviro said at a recent news conference on corporate tax reform at the American Enterprise Institute, a conservative think tank.
Reform bills were introduced in the House and Senate last year but didn’t get much attention. Smaller bills have also been introduced in Congress, such as a bill proposed by Rep. Brad Schneider, D-Ill., focusing on the impact tax reform would have on small businesses. Schneider’s bill is getting some traction, as it recently gained both Republican and Democratic co-sponsors.
Keeping profits abroad
Part of the reason the tax code is so difficult to change is because many parts of the code need revision. Robert Pozen, an economist and senior fellow at The Brookings Institution, a nonprofit research organization, said Congress is working towards the wrong changes.
“Instead of being caught in a food fight around general corporate tax reform, Congress should focus on the most counterproductive aspect of the American tax system – its treatment of foreign profits of U.S. corporations,” Pozen said in a Brookings Institution research paper.
According to Martin Sullivan, a chief economist at Tax Analysts, a tax news publishing website, changing this law would not raise tax revenue and would hurt big multinational companies like Google, Apple and Cisco.
“If we do international tax reform, we’re going to be hurting companies that do research,” Sullivan said at the AEI news conference.
High tax rates
Unlike other countries, the U.S. relies heavily on its corporate tax rate because it lacks federal tax measures such as value added taxes or carbon taxes, which are efforts to reduce the amount of greenhouse gases by having companies pay for carbon emissions.
Other countries, such as the United Kingdom, have been able to reduce their corporate tax rates by relying on other forms of tax revenue like the VAT.
“Why is the United States, which is arguably one of the most pro-capitalist countries in the world – why does it have the highest corporate rate in the world?” Sullivan said. “I think the simple answer is that other countries have other sources of revenue.”
Still, many people say the rate could be lowered because closed loopholes would generate more tax revenue to balance the lower rate. The Ways and Means Committee discussion draft of the issue suggests reducing the rate to 25 percent to match most other countries. Some economists, like Sullivan, think this goal is far too optimistic.
Laura Tyson, another AEI panelist and adviser at the Alliance for Competitive Taxation, a group of businesses advocating for tax reform, said the goal is well within reach.
“According to the ACT members … they feel we can get to 25,” she said. “I leave this to the people who actually do run the numbers, but there is a real sense that you could get to well below 30, in the 25 range.”
Getting formal leadership
Though Obama supported tax reform in his annual address to Congress, Sullivan thinks tax reform is not high on his – or any Democrat’s – agenda.
“I don’t think you’re going to see a serious effort for tax reform until 2017, and that’s only if a Republican is elected,” Sullivan said. “As much as I like and would want corporate tax reform, I just don’t see any way of getting there now.”
In February 2012, Obama released a report from the Department of Treasury discussing a framework for business tax reform, including reforms such as eliminating tax loopholes simplifying tax codes for small businesses. However, the report also stated that “the president recognizes that tax reform will take time [and] require work on a bipartisan basis.”
Still, Tyson, who chaired Clinton’s Council of Economic Advisers, said the administration has made significant progress.
“I don’t really agree that the president has shown no leadership,” Tyson said. “I’ve talked to his economic team. They have moved over the course of the last several years to being pretty strongly in support of significant corporate tax reform that is revenue neutral.”
