How fiscally prudent is "lower the rate and broaden the base"?
Mar. 8, 2012 — The corporate tax reform mantra these days — at least on the Democratic side of the aisle — is “lower the rates and broaden the base.” Supporters frequently say that the goal is a corporate tax system that makes the United States more competitive in relation to other industrialized democracies, reduces inequities and inefficiencies, and is ultimately “revenue neutral.” But serious questions have been raised about the premises underlying the vision of lowering rates and closing unwarranted corporate tax loopholes concurrently, and about the fiscal prudence and ultimate revenue neutrality of proceeding in that manner.
An alternative way to proceed would be to close unwarranted loopholes first, allow the dust to settle, and then make an independent determination about what is the fiscally and economically prudent course on corporate tax rates. After all, in addition to reductions in statutory rate, both the effective corporate tax rate and corporate tax revenues as a percentage of GDP have trended downward over the decades (see bottom box).
For some, the step-by-step approach is a political non-starter: “That’s not going to happen,” said Dean Baker, co-director of the Center for Economic Policy and Research, a progressive think-tank in Washington. “I think it makes more sense to try and close some of the loopholes and lower the rates rather than doing nothing.”
To Robert S. McIntyre, though, the idea of packaging loophole-closing and rate reduction together is a “terrible strategy for the Democrats.” McIntyre is director of Citizens for Tax Justice, another progressive advocacy organization in Washington. First of all, he said, “Republicans will want to compromise off [a revenue neutral proposal], which means that it will lose money.” Second, McIntyre adheres to the view that corporate tax reform is supposed to “raise some money” in the course of closing tax breaks, characterizing the abandonment of such a goal — the “revenue-positive” approach — as a “complete surrender” of the principle that is supposed to animate reform.
Rates and distributional fairness
Among the arguments often deployed in support of combining rate reduction with elimination of various corporate tax breaks is that it is important to create a more even playing field in terms of the taxes paid by corporations in different sectors. It is not disputed that, currently, a corporation’s effective tax rate can vary wildly depending on whether the corporation is in a high-tax-break or lower-tax-break industry, and on the finesse with which a corporation’s accountants and attorneys work the system.
But do concerns about enhancing inter-corporate equity and generating greater predictability on taxes mean that rates need to be reduced? Actually not, according to a range of tax policy analysts. Jim Kessler, for example, the senior policy vice president for policy and a co-founder of Third Way, a Washington advocacy organization that bills itself as centrist, agreed that his stated goals of simplification, equity, and predictability do not require a particular nominal tax rate — the goals could be achieved by reducing loopholes and treating corporations in different sectors alike regardless of rate. (A separate goal of Third Way — remedying what it sees as a rate that puts the U.S. at a competitive disadvantage when it comes to corporate decisions as to where to locate their operations, of course, would require rate reduction).
Eugene Steuerle, a tax policy expert who is now a fellow at the Urban Institute and who is described on the Institute’s website as the “Economic Coordinator and original organizer of the 1984 Treasury study that led to the Tax Reform Act of 1986,” concurs with Kessler, agreeing that a decision to reduce variation in effective rates could be done as easily at a nominal rate of 35 percent as it could be done at a nominal rate of 28 percent.
And Baker agrees that, “at least as a logical matter” there is “no reason you have to lower the rates to equalize” the system.