U.S. Corporate Tax Code Is Terribly Inefficient
The president advances a coherent if imperfect framework that includes excellent proposals
February 24, 2012
Our corporate income tax code is terribly inefficient: Its tax rate is one of the highest in the developed world, yet it raises less revenue than most other wealthy countries (as a share of the economy) because it is riddled with loopholes and subsidies. Some large U.S. businesses are completely exempt from the tax.
Recognizing that the system is ripe for reform, the president has advanced a coherent framework that includes some excellent proposals—particularly a minimum tax on the foreign profits of U.S.-based multinationals.
Right now the tax code is tilted in favor of investments overseas, not here at home. It also encourages multinationals to shift profits earned in the United States into the Cayman Islands and other foreign tax havens. Corporate lobbyists are pressuring Congress to go even further and set the U.S. tax rate on foreign profits at zero. To his credit, the president has resisted this lobbying campaign, proposing instead a minimum tax on foreign profits to make sure the tax code is not stacked against U.S. production by multinationals.
The main problem with the president's proposal is that it won't reduce budget deficits. It only aims at "revenue neutrality"—that is, to raise the same amount of money as the current corporate tax system. This would be acceptable if the country were on a strong, sustainable budget path, but we're not.
To rein in long-term deficits, policymakers will face wrenching choices that are likely to put downward pressure on investments in science research, infrastructure, and education, among other things—areas where well-designed investments hold the promise of boosting productivity and hence future economic growth. The corporate sector itself has a stake both in the nation's long-term fiscal sustainability and in adequate productivity-increasing investments.
The 2013 budget that the president issued earlier this month proposed more than $200 billion in deficit reduction by shrinking corporate tax breaks. Given the sacrifices that policymakers are considering in virtually every other part of the budget—from Medicare to defense—this would be a better revenue target for corporate tax reform than revenue neutrality.