Step 1: Corporate tax giveaways. Step 2: Outcry. Step 3: Profit!

January 3, 2013

Pundits on both left and right were outraged when they realized a whole flotilla of corporate tax giveaways were buried in the fiscal cliff deal, ranging from a tax break for race-car track owners to electric-scooter makers.


(Jeff Zelevansky/Getty)

"Surely, a modest hike in income taxes for people who make more than $400k in income ... would be worth trading off for the few hundred billion dollars in corporate pork. This is what the fiscal cliff is about – who gets the money," asserted Matt Stoller, a former staffer for Rep. Alan Grayson (D-Fl). The Washington Examiner's Tim Carney explains that the tax breaks came out of Senate legislation that "attracted lobbyists like a raw steak attracts wolves." 

But the animus against the narrowly targeted tax breaks — known on the Hill as "tax extenders" — could actually help corporations in their effort to land a much bigger prize than temporary giveaways: comprehensive corporate tax reform.

Neither party actually likes the current tax system for corporations, which both Democrats and Republicans agree is riddled with too many loopholes and complexities. And even the businesses that profit from tax extenders agree that the system is completely batty, as its hangs on temporary, one-year fixes that are perpetually scheduled to go away. (Read my colleague Brad Plumer on the havoc this has wreaked on the wind industry).

Instead, there's a strong appetite among both corporations and lawmakers to overhaul the entire corporate tax code. Both Democrats and Republicans agree that we should simplify the system, in part by eliminating many of the tax loopholes that the general public gets so incensed about. At the same, both parties have promised that such reform would also be accompanied by significant cuts to the corporate tax rate, which is officially at 35 percent: Republicans want to lower it to 25 percent, and the White House says it wants to go to 28 percent.

A comprehensive overhaul would also deal with overseas earnings, paving the way for corporations to make their case for a GOP-backed transition to a territorial tax system that would eliminate all taxes on foreign income — the holy grail for multinationals. And for big business, the benefits from lower corporate rates and overseas tax reform would massively outweigh any losses they might incur if a handful of tax giveaways went away. And both Republicans and the White House agreed that the package should be "revenue-neutral" — i.e., the overall tax burden on corporations would be the same, just enacted through a tax code that would be simpler and more efficient.

But corporations face a tough road ahead for tax reform: Early in the fiscal cliff talks, Democrats and Republicans agreed that a corporate tax overhaul should be attached to the "grand bargain," and Obama explicitly put it on the table during the negotiations as a carrot for Republicans. However, when the prospect of a big deal fell apart, corporate tax reform fell by the wayside and wasn't include in the final bill. 

There might be a chance for corporate tax reform to reemerge in the second round of fiscal cliff negotiations, and both House and Senate leaders have vowed to start hammering out a legislation regardless. But it's far from a given that it will happen this year: Liberal Democrats are pushing for a corporate tax overhaul that raises some revenue, but the White House has previously committed to revenue-neutral reform, which wouldn't offset the sequester. Republicans are far more focused on cutting spending through entitlement changes.

As such, the recent broadsides against our current corporate tax policy could actually help corporations make the case for a comprehensive overhaul. A war against tax loopholes is far more appealing to partisan on both sides (and the general public) than lower tax rates for corporations, but both parties have promised that the two parts must go hand in hand.

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Ezra Klein | January 3, 2013