Time for Bipartisan Agreement on Tax Reform

There is no doubt I should be writing about the tragic shooting of Rep. Gabrielle Giffords. But the wild media narrative, which has taken every conceivable twist and turn, has veered into an area that I am loath to discuss. Partisan point scoring, which is what this whole tragedy has become, may drive website traffic, but it also drives me up the wall. The fact is, young adults are increasingly being driven away from the two parties by partisan attacks that appeal to a narrow, if influential, part of the base.

[Photo Gallery: Gabrielle Giffords Shooting in Arizona.]

Recent polling has shown that Americans increasingly avoid being identified as a Republican or Democrat, instead choosing to be labeled as independents. If the parties want to reverse that trend, especially among disaffected young adults, it’s time we see less argument and more debate. In short: To broaden the base, increase the debate. No partisan games. No finger pointing. No one-upsmanship. Because frankly, there is no more time for that. We’ve got problems that demand solutions. 

Our mess of a tax code is one of them. Lost amid the tragedy of the past weekend was the fact that the Senate Finance Committee has begun to hold hearings on tax reform. Fortunately, this is an area where bipartisan agreement is possible. There is universal agreement that cleaning up and stabilizing our tax code could contribute some much-needed certainty to an ailing economy.

Any discussion on tax reform should start with the principle of broadening the base and lowering the rates. This is especially true in our corporate tax structure, which has fallen behind the rest of the world in allowing our businesses to compete in the new globalized economy. As Dr. Mark Mazur stated in his testimony before the Senate Finance Committee:

In 1986, the U.S. corporate income tax rate was reduced by twelve percentage points, which made the United States a relatively low corporate income tax rate country for the next several years. Since that time, however, other developed countries have cut their maximum corporate tax rates, and the United States now has a statutory corporate rate that is above that in most other developed countries.

To clarify Mazur’s point—the United States currently has the second highest corporate income tax rate in the world (39.5 percent), second only to Japan. That won’t last long because Japan announced last month that it is planning to cut its corporate rate by 5 percentage points in a bid to “spur companies to invest domestically, expand employment and raise wages,” according to their Prime Minister Naoto Kan.

I can almost hear the commenters ready to jump on me for saying our companies are burdened by high tax rates. So let me clear up a point of contention—the statutory tax rate is much different than what companies actually pay. While it is technically accurate to say we’ll soon have the highest corporate tax rate, in reality our government collects the fourth lowest corporate revenues among developed nations. The disparity comes from the numerous loopholes, write offs, and credits that have allowed corporations to “hide” money or keep it in tax havens overseas.

But this argument is just as misleading as the conservative point. To many corporations and CEOs, the effective rate is not the one that matters. That’s because the maze of tax shelters is “so complex your head could blow completely off,” said Safra Catz, president and CFO of Oracle Corporation. A 2007 conference of CEOs convened by former Treasury Secretary Henry Paulson echoed the point, unanimously agreeing that they would trade our complicated code for a lower rate. [Check out a roundup of this month's best political cartoons.]

In addition to the high corporate rate, we are one of the few nations to still use a “world-wide” system in which U.S. companies are taxed not just on profits made within our borders, but also for money they make anywhere in the world. It is true that companies can defer paying these taxes so long as they don’t repatriate that money back into the states. But that just encourages the perverse result of incentivizing companies to invest their profits overseas.

A corporate tax reform package should solve this problem by following the lead of developed nations toward a “territorial” tax system. The Joint Committee on Taxation argues that, “A territorial system arguably promotes economic efficiency better than a worldwide tax system, because a territorial system treats all investment within a particular source country the same, regardless of the residence of the investor.” Making the switch would end our system of double taxation and encourage companies to once again invest their global earnings in the United States.

Although the Senate hearings were largely ignored by the media, tax reform is high on the agenda of both parties.  Senate Majority Leader Harry Reid said last Thursday “the country is ripe for tax reform.” His colleague across the aisle, Minority Leader Mitch McConnell responded “I think we all know the tax code is a disaster, and we—any effort to simplify the tax code, to get the rates down to make it more fair, I think we’d be open to discussing that.”

For good or bad, the Giffords tragedy has been used to highlight the need to tone down the partisan rhetoric and begin solving some of our nation’s pressing problems. Tax reform would be a welcome place to start. We agree on the goal—broaden the base and lower the rates. If the parties can now agree to have an honest debate without all the hate, I’d be surprised if they didn’t broaden their base of support.

• See photos of the Gabrielle Giffords Shooting in Arizona.
• Take the poll: Is Political Rhetoric To Blame for Arizona Shooting?
• Follow the money in Congress.