Washington’s Totally Terrible Corporate Tax Debate

Obama embraces revenue neutral corporate tax reform, one of the worst ideas in Washington.

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A Congressional staffer with the Senate Budget Committee distributes copies of Obama's Fiscal Year 2014 Budget proposal on April 10, 2013, to Senate staff on Capitol Hill.

Congressional Republicans have reacted in one of two ways to the budget President Obama released this week. The first, exhibited by Rep. Greg Walden, R-Ore., is to blast it as a "shocking attack on seniors." The other – adopted by Speaker of the House John Boehner, R-Ohio, and House Ways and Means Chairman Dave Camp, R-Mich. – is to attempt to bank the more conservative aspects of the budget, such as its cut to Social Security, without acceding to any of Obama's corresponding demands.

In the latter vein, Republicans seem excited that Obama's budget lines up with the GOP's in its call for revenue neutral corporate tax reform. Both parties agree, at least on paper, that the proper way to reform the corporate tax code is to close loopholes and eliminate deductions, and then use the money raised to lower the corporate tax rate, rather than to reduce the deficit or finance something else. (Never mind that Republicans express shock and dismay every time Obama calls for ending specific corporate tax breaks, such as those for the oil and gas industries.)

Camp reaffirmed during a Christian Science Monitor breakfast yesterday (attended by my editor, Robert Schlesinger) that he wants corporate tax reform to be revenue neutral and is happy with the president's embrace of the idea. "The president's position has evolved on that and I'm very pleased," Camp said.

[See a collection of political cartoons on the budget and deficit.]

The president has admitted that this budget is not his "ideal plan," but rather – it seems – an attempt to win Republican support or prove that he is the grown up in the room. And this particular evolution makes it even less ideal, as revenue neutral corporate tax reform is among the worst budget ideas out there.

Proponents of cutting the U.S. corporate tax rate like to claim that America currently sports the highest rate in the world. And that's true on paper. But due to the plethora of loopholes, deductions, credits, and the outright tax evasion in which many businesses engage, the effective corporate tax rate in the United States is among the developed world's lowest. U.S corporate tax revenue comes in about 25 percent below the average in the Organization for Economic Cooperation and Development.

[See a collection of political cartoons on the economy.]

To illustrate this point, Citizens for Tax Justice released a report yesterday showing that 10 major U.S. corporations – household names like General Electric, FedEx, and Facebook – made a combined $16 billion in profits last year while not paying a dime in federal corporate income tax. Facebook was able to wipe out its entire tax liability with a single, solitary tax break. (As its executives might say, "Like!")

The Century Foundation has noted that "in 1952, the corporate income tax accounted for about one third of all federal tax revenue," but "corporate taxes supply less than 9 percent of federal revenues today." Business Insider also showed that corporate profit margins have achieved a new record high, while worker wages are at post-war lows. It seems unlikely that such results could occur if companies were being taxed into oblivion as conservatives continually claim. Billionaire investor Warren Buffett perhaps put it best when he said on CNBC that high U.S. corporate taxes are simply "a myth."

[Read the U.S. News Debate: Has President Obama Given Away Too Much In His Budget?]

Given the reality that, after the economy recovers, the U.S. will have to begin to reduce its deficit, adopting a revenue neutral corporate tax reform package would constitute a colossal missed opportunity. There's nothing wrong with clearing out loopholes and deductions, and even lowering the marginal corporate rate a bit; the mistake would be in foregoing all of the revenue chasing ever-lower corporate tax rates, rather than taking advantage of the funds to balance the books.

In the end, it's unlikely that corporate tax reform actually occurs anytime soon. But putting the idea of revenue neutral reform in his budget is one more way in which Obama is ceding ground to the Republicans on economic issues in an attempt to meet some amorphous definition of "reasonable," rather than making the case for what is best economically.

  • Read Robert Schlesinger: Dave Camp Says Tax Reform Will Prevent Senate Run
  • Read Ford O'Connell: Mitch McConnell's Tape and the 2014 Senate Landscape
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