Evan Soltas
Feb 24, 2012

Deal or No Deal?

Obama's corporate tax reform: enthusiasm and criticism

I think Republicans are getting their hostility to the President's corporate tax reform proposal largely wrong. Sure, I have some significant criticisms of it --the discounted 25 percent rate for manufacturers, the lack of a shift to a territorial system, the persecution of multinationals, continuing rate inequality by corporate structure -- but this would be a substantial step forward if passed.

I like it because it reduces the headline federal rate of 35 percent to 28 percent but takes out what are called "tax expenditures": exemptions, deductions, loopholes, credits, etc. Resources used to game the tax code are economically unproductive and thus wasted. Furthermore, the difficulty of the tax code is a burden which falls disproportionately on smaller firms -- that is, compliance costs are highly regressive, and I think I can fairly conjecture that the largest enterprises are benefiting disproportionally from the tax expenditures. (The New York Times actually did a series of reports called "But Nobody Pays That" which began with the revelation that General Electric had a net tax benefit of $3.2 billion.)

Let me add another reason (the last one I listed above) which has been largely left out of the conversation. There are substantial inefficiency costs, according to a 2002 study by Austan Goolsbee (who you might remember as Obama's former economist), when firms try to game the corporate income tax by using organizational form as a method of tax mitigation.

Romney wants the rate to be 25 percent -- the CBO says that 28 percent is the lowest we can go without increasing the structural deficit, but it's not really clear from the Times summary to what extent various factors -- incorporation rates, sales -- are held static to calculate their estimate when a dynamic calculation, i.e. considering elasticity in response to changes in the corporate tax rate, would be more realistic.

I think there are much more important arguments the Republicans could make than "it should be lower," pace Romney. They should emphasize that corporate tax reform should be a piece in a larger competitiveness agenda, including reform of Sarbanes-Oxley and the larger regulatory structure, a sweeping remake of the tax code in accordance with the Bowles-Simpson blueprint, an energized free-trade diplomacy push, an expansion of business and education visas and the naturalization window for the most deserving immigrants. There is a convincing argument here, I think, that a way to victory for Republicans in 2012 will be in the "vision thing" -- selling the American public a comprehensive, narrative-driven reform contract à la 1994.