How fiscally prudent is "lower the rate and broaden the base"?

Original Reporting | By Craig Gurian |

I presented two scenarios in my questioning. In the first, there is loophole closing prior to any rate reduction. In the second, rate reduction occurs simultaneously with loophole closing. I suggested that Congress would be much more readily amenable to remedying any ill effects of “too much” loophole closing (responding, for example, if a business sector were able to produce evidence that it was being unfairly hurt by the absence of a credit or preference) than it would be if a problem arose because rate reduction turned out to be a mistake (for example, if the revenue lost came to be missed, if the lower rates did initiate a renewed race to the bottom with other countries, or otherwise).

Kessler agreed that, from a political point of view, the lowered rate is locked in more securely than are the elimination of tax breaks, although he argued that the need, in general, to get 60 votes in the Senate would operate to make restoration of tax breaks more difficult. (Getting to 60 may not always be as difficult as it may seem. Sometimes a tax break, even if it is one that a particular Senator does not affirmatively support and isn’t afraid to oppose, comes packaged in a bill for which the Senator believes he must vote.)

McIntyre said that it would be distinctly more difficult to remedy an ill-conceived rate reduction given the level of corporate influence: “It’s very hard to raise their rate. Absent a World War, I don’t know how we could do it.”

 

So why go ahead?

Kessler said he thought “it’s worth rolling the dice.” The level of risk in doing so is, in his view, low: he did not believe that any error in estimating the scope of the fiscal impact of rate reduction would be significant. In contrast, he thought the potential benefit of making change would be significant, saying that he believed the current tax system is “not anywhere near the optimal place where it should be on the corporate side.” Kessler also said it was essential to adapt the system to a world that is significantly more globalized than it was at the time of the last major overhaul 25 years ago.

The abandonment of a “revenue-positive” approach is a “complete surrender” of the principle that is supposed to animate corporate tax reform. — Robert S. McIntyre, director of Citizens for Tax Justice

Baker’s rationales for proceeding with “lower the rate and broaden the base” was that simultaneity was the only politically feasible way to achieve two desirable results: greater distributional equity, and a reduction in the “total waste” of a big industry devoted to wangling tax breaks. “If we could instead of having General Electric pay however much they’re paying their accountants…to the government, that’s a big gain. And if that means some other companies are instead paying less in tax, that’s to my mind still positive.”

Alice Rivlin, the first director of the Congressional Budget Office and a member of 2010’s Bowles-Simpson panel, also thought rate reduction should proceed simultaneously with loophole elimination. Wouldn’t waiting to make a separate decision on rates be more fiscally prudent? Rivlin said “no.” Her reasoning, ironically, is derived from the fact that corporate tax receipts have “shrunk as a source of revenue over many years” (she characterized corporate tax revenues as “tiny”). As such, even a rate reduction that turned out to be unwise, she argued, would not have significant fiscal consequences. Thus, she concluded, on the corporate taxation side “you can’t make the argument that we should wait and see if we really need [more lowering of rates].”

And the Treasury? Again, even on background and in the face of multiple inquiries, Treasury wouldn’t speak to the issue of the fiscal prudence of proceeding with rate cuts at the same time as loophole closing. The spokesperson with whom I was in contact likewise would not address the asymmetry between: (1) the difficulty, if a course correction came to be needed. in restoring rates that had been cut; and (2) the ease with which, subsequent to loophole closing, an independent decision to lower rates could always be made, if warranted. (These were among the questions to which Sen. Wyden’s office did not respond.)

 

Or perhaps not?

CTJ’s McIntyre is still sounding the call for revenue-positive corporate tax reform because “the alternatives are not very pretty.” If the Congress “does not get some money out of the corporations and the wealthy people, then they have to get it somewhere else to deal with the deficit,” and that, McIntyre said, means entitlement programs, infrastructure, and education funding — are things that he characterized as “much more important to most Americans and, in my view, all a lot more important to a successful business economy as well.”

Plenty of candidates for stand-alone loophole closing

Robert S. McIntyre of Citizens for Tax Justice has a long list of what he considers unwarranted corporate tax breaks, but he identified as a giant one the current rule that allows U.S. companies to “defer” U.S. taxes on their offshore profits until those profits are brought back to the U.S., a process that may take years if it happens at all. The cost to taxpayers, according to a CTJ report: at least $50 billion per year. 

McIntyre derides the argument in favor of maintaining or expanding the tax break as coming down to, “The other countries aren’t good at policing offshore abuses either, so we can’t be the ones who do,” or “We won’t be able to compete in China against a French company that wants to build a factory there and won’t have to worry about any French taxes.”

Jim Kessler of Third Way also has candidates for loopholes that deserve to be closed independent of whether anything is done regarding corporate tax rates. Among these are the provision that allows oil and gas producers to take an immediate expense deduction for intangible drilling costs. In a submission to last year’s “Super Committee” that was charged with identifying the means by which to reduce the deficit by $1.2 trillion over 10 years, Third Way said that the provision “inappropriately insulated investors from the risks” of their projects, and estimated the 10-year cost of the tax break at $12.5 billion. Another tax break for that industry — a depletion allowance that allows independent oil and gas producers to shelter about 15 percent of their income — was described as “an unnecessary industry-specific subsidy” that costs taxpayers $11.2 billion over 10 years.

And Eugene Steuerle of the Urban Institute nominated for close scrutiny the current system of “tax arbitrage” by which a company can, for example, create highly negative tax rates by “borrowing and buying equipment for which you now get 100 percent expensing on a temporary basis.” The “classic game” being played by international companies “has been to put their interest deductions in the high-rate country — that’s the U.S.” at the same time that they disproportionately book income in a foreign country.

A Treasury Department spokesperson, speaking on background, confirmed that President Obama continues to believe that there are corporate tax loopholes that should be eliminated even in the absence of rate reduction, but would only specify the President’s call to end oil and gas subsidies.

 

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