Political Will for Corporate Tax Reform Reaching Critical Mass

Can reform please corporations and lawmakers and simultaneously boost the economy?

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At first glance, corporate tax reform looks like a sure bet, with broad bipartisan backing, not to mention the support of America's powerful business community. What good it would do, however, is an entirely different question.

Nearly all parties to the debate agree that something needs to be done, and political will may have reached critical mass in Washington. Earlier this year in debt ceiling negotiations, the bipartisan Gang of Six included tax reform among its long-term deficit-cutting proposals. And this week, the Senate Finance Committee held a hearing asking for perspectives of CEOs from four major U.S. corporations: retail giant Walmart, pharmacy chain CVS, consumer goods manufacturer Kimberly Clark, and superconductor maker PMC-Sierra. Corporations believe that the current system's unfairly high rates drive business to more favorable countries. Other critics point out that the byzantine tax code allows corporations to find innumerable ways to avoid paying millions of dollars that they owe. The end result may be a weakened U.S. economy. Montana Democrat Sen. Max Baucus, the committee chairman, emphasized this in his opening statement: "In today's global economy, we simply can't afford for the tax code to hamper businesses' ability to compete and create jobs here at home. We need corporate tax rules that encourage job creation and widespread economic growth."

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Chief among the business community's litany of complaints against the current code is the country's relatively high corporate tax rate. The United States has the second-highest official combined average corporate income tax rate in the world, behind Japan. In addition, corporations complain that they are "double-taxed" for their foreign earnings. Under the current system, corporations are taxed for foreign earnings that are "repatriated" to the United States. As a result, those entities keep substantial foreign earnings overseas. According to Moody's research, as much as half of the $1.2 trillion that corporations are keeping in reserve is being held in foreign countries. If tax rates are reduced and the country switches to a "territorial" tax system—that is, one that taxes domestic earnings—that could spur more businesses to base themselves in and move assets to the United States and thus create jobs.

Corporations may complain about unfairly high tax rates, but thanks to incentives, deductions, and loopholes, many find ways to pay far less. Those incentives came under intense scrutiny in March, when the New York Times reported that G.E., which reported $14.2 billion in 2010 profits, paid no U.S. taxes that year, and in fact claimed a tax benefit of $3.2 billion. A G.E. spokeswoman told the Times that the corporation was "committed to complying with tax rules" while still upholding its responsibility to its shareholders to "legally minimize" costs. To ensure that such reform does not drastically slash government revenue, most tax reform proponents also advocate a substantial reform to tax incentives.

Finding the intersection between encouraging business in the United States and encouraging overall economic growth is the challenge facing lawmakers. Caroline Harris, chief tax counsel for the U.S. Chamber of Commerce, notes that particular elements are crucial before the business community will support reform. A bill proposed in 2010 by Oregon Democratic Sen. Ron Wyden and former New Hampshire Republican Sen. Judd Gregg, for example, proposed a corporate income tax rate of 24 percent but was lacking in other areas, says Harris. "At the time it was drafted, in original form, it didn't shift to a territorial system, and it took away mechanisms like deferral that mitigated some of the double-taxation out there. It was not a good business-friendly tax plan," she says.

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Making sure that lawmakers do not conflate the good of corporations and the good of the country is going to be one key difficulty in any reform, says Seth Hanlon, director of fiscal reform at the left-leaning Center for American Progress. "I think there's some corporate tax reform that can be good for the overall economy and the competitiveness of U.S. companies, but Congress shouldn't confuse the two goals. And the primary goal should be the competitiveness of the U.S. economy, the U.S. as an investment location, and most of all, U.S. workers," he says.