Time for an overhaul?

Len Burman, Syracuse University:

I applaud the Administration for taking a first crack at corporate tax reform. It is urgently needed. Our current tax system is a mess. We have the highest rates in the world and raise relatively little revenue. Some industries pay little or no tax while some are taxed quite heavily. The tax distorts the way companies do business and where they choose to do it. The Administration’s proposed “framework” would broaden the corporate tax base and lower the rate, which will reduce the economic costs of the tax. Taxing different kinds of businesses under similar rules will also reduce economic distortions.

However, I do have some concerns. You’d be hard-pressed to find any economists who are not industry lobbyists who think that the manufacturers’ deduction is a good idea. It should be abolished, not reformed. If there are flaws in the rules governing multinationals, fix them. We don’t need another minimum tax for multinationals. And instead of presenting a “framework,” present a proposal. The Administration should have a fully articulated plan that shows how the pieces fit together and the numbers add up. Clearly something like that exists behind the doors of Treasury. Let’s see it.

Doug Holtz-Eakin, former CBO director and chief economic adviser to John McCain in 2008:

The “President’s Framework for Business Tax Reform” is not tax reform. First, despite the ballyhoo, it is thin on details and largely restates proposals from his Budget. Second, the endpoint is not tax reform; it’s just another bad tax code.

Why? Start with the top line: a reduction in the tax rate to 28 percent, well above the 25 percent needed to get the U.S. in the international competitive game. And — here’s a real mystery — the Administration passed up the chance to reduce it further by insisting on raising tax revenues. And an important detail omitted is how to reconcile the corporation reform with the President’s desire to raise taxes on pass-thru entities and small businesses. One cannot do corporation reform in isolation and the President has no individual reform.

The other glaring misstep is the new minimum tax on foreign earnings of global companies. Is this really new? No. We currently tax the worldwide earnings of global companies (albeit with deferral of some tax until the money is brought back to the U.S.). This has put the U.S. out of step with every major economic competitor. (For a full discussion, see here.) The President’s own fiscal reform commission recommended moving away from this archaic approach. Consistent with his track record of ignoring all things Bowles-Simpson, the President is moving in the wrong direction.

Finally, the other attention-getter is trading an existing tax break for manufacturing for another tax break for manufacturing (plus a double-bonus inefficiency for high tech manufacturing). I guarantee the reintroduction of the McRib would qualify McDonald’s for a tax break. This is just pandering and bad tax policy. Not reform.

I was hopeful that the White House had gotten the message that leadership was needed to achieve much-needed reform. This is such a modest proposal that it does not rise to meet the challenge. Of course, the year has just begun and the opportunity for improvement remains.

Brad Badertscher, CFA and assistant professor of accountancy in the University of Notre Dame’s Mendoza College of Business:

The Obama administration proposed lowering the top income-tax rate for corporations to 28% from 35%, which despite the decrease would actually raise overall tax revenue by eliminating dozens of deductions in an effort to restructure the corporate tax code. The new proposal would offer new tax benefits for U.S. manufacturers while raising taxes on U.S. companies with large operations in other countries. Despite the proposed decrease to 28%, the U.S. would still be above the average world corporate tax rate which is closer to 25%. Therefore it is unclear how this new proposal would allow U.S firms to be more competitive in the world if on average the amount of taxes paid by U.S firms is actually going to increase and the tax rate is still higher than most other countries. Overall, lowering the tax rate for U.S. corporations seems like step in the right direction but with the elimination of popular deductions the proposal actually increases the average amount of taxes paid by corporations.

Robert McIntyre, Citizens for Tax Justice:

The corporate tax reform “framework” released by the Obama administration today fails to raise revenue that could be used to make public investments in America’s economy and America’s future. We can and should collect more tax revenue from corporations. Right now, America’s biggest and most profitable corporations are paying, on average, a ridiculously low amount in federal income taxes, and many of them are paying nothing at all. ...

It’s very disappointing that the President has proposed what is at best “revenue-neutral” corporate tax reform. In 1986, President Reagan and Congress passed a tax reform act that increased corporate tax payments by more than a third. In today’s terms, that would be a corporate tax increase of more than a trillion dollars over the next 10 years. The corporate tax reform that we need today should do no less.

Clint Stretch, Managing Principal, Tax Policy Group, Deloitte Tax LLP:

The President’s corporate tax reform plan raises all the major issues: rates, international tax, debt financing, depreciation, and R&D; but does so with the same lack of detail that has characterized other reform discussions to date. For example, the taxation of multinational businesses — one of the most important issues in any reform — is handled in a mere 1,200 words. In addition, the whitepaper pulls its punches with statements about what “should be considered” rather than what should be done. There is no way to really evaluate the whitepaper as a “plan.”

Mark W. Everson, alliantgroup Vice Chairman and former Commissioner of the IRS (2003-2007):

In laying down its marker for business tax reform, the Administration has recognized the need for presidential leadership. While pushing for simplification, rate reduction, and greater permanency in the tax code, the Administration wisely advocates that certain incentives be continued or even strengthened — notably for manufacturing and the promotion of innovation. The Administration wants to increase the competitiveness of American businesses “large and small.” Establishing a balanced approach won’t be easy given the political fire power of large multinational corporations. Moreover, meaningful business tax reform will likely only be achieved as part of a broader effort also addressing individual tax reform. Congress should take into account all the moving parts, not just some of them.”

Donald Marron, Director of the Urban-Brookings Tax Policy Center:

In its new report, the Administration does an excellent job documenting the failings of America’s corporate tax system. That system pairs the world’s second-highest statutory tax rate with excessively generous tax breaks. Taxes thus have disproportionate influence on corporate decisions, yet generate relatively little revenue. The system discriminates among industries, favoring some with low tax rates (e.g., mining), while hitting others much harder (e.g., retail). And it favors debt financing, rather than equity, more than any other developed nation. The solution to all those problems is to eliminate many needless tax breaks, and use the resulting revenue to lower the corporate tax rate. In broad strokes, that’s what the Administration proposes, dropping the corporate rate from 35 percent to 28 percent while paring back on many tax subsidies. The proposal isn’t pure by any means — for example, it recommends even larger tax breaks for manufacturing. And it provides little detail about exactly how it would raise revenue by reducing tax breaks. But it’s still an excellent contribution to the policy discussion.

Todd McCracken, president of National Small Business Association :

The corporate tax reform proposal, while it does include some positive language for small-business, doesn’t go far enough in ensuring fairness, transparency and eased complexity of the U.S. tax code. Few disagree that a simplified tax system will lead to significantly greater economic growth, but unfortunately the proposal misses the mark on that goal by failing to embrace broad tax reform such as the Fair Tax. It does, however make some very positive proposals for small business, including an expansion and permanency of the R&E tax credit; increased Section 179 expensing to $1 million; a doubling of the deduction for start-up costs from $5,000 to $10,000; and allowing cash accounting on businesses with up to $10 million in gross receipts.

Unfortunately, small businesses soon could be facing tax rates of up to 40 percent or more — there are a great many more details needed in this proposal to determine just how much it will help or harm small business.

Rob Atkinson, president of the Information Technology and Innovation Foundation:

“Not adding a dime to the deficit” might win votes but it won’t fix a fundamentally uncompetitive U.S. corporate tax code. In fact, we need to add more than a dime to the deficit if we truly want to lower the tax burden on the companies, especially those creating the products and jobs of the future and competing in international markets.

For example, while expanding and making permanent the R&D tax credit is critical for innovation-based competitiveness, the Administration needs go further and propose raising the credit the credit to 20 percent, not 17 percent.The Administration would do well to also follow the lead of many of our competitors and introduce a “patent box” that taxes income from innovation at a lower rate.

The administration touts the benefits of simplicity and a tax code that does not “distort” investment decisions. But not all distortions are anti-growth, many, such as the R&D credit and accelerated depreciation are growth enhancing.

Daniel Shaviro, professor of tax law at New York University:

In general, I like the plan to lower the corporate rate to 28 percent and pay for it through base-broadening — although the disparity this would create between the corporate and top individual rates needs to be dealt with. For example, it affects business entity choices, which the report agrees is important, and encourages self-employed individuals to avoid the top individual rate by using wholly-owned corporate entities and under-paying themselves.

The focus on a special low rate for domestic manufacturing is unfortunate and egregious, and has zero support from tax experts who are not being paid to support it.

On the international front, I agree about the importance of addressing income-shifting by U.S. companies that cause all their income to arise for tax purposes in tax havens. But I believe that this is less about jobs, which may not be hugely affected, then about (a) a level playing field between multinationals and other businesses with regard to the tax they face on earning income in the U.S., and (b) progressivity, since high-income individuals who hit “home runs” via corporate entities, such as Google or Facebook, can avoid the corporate tax on their earnings (which is a proxy for taxing them directly) if they can report most of their income as arising in tax havens.

I’m a bit skeptical about the approach the Administration is suggesting on the international front, but that is not to deny that it might be better than doing nothing. It does reduce the effectiveness of income-shifting and “deferral” maneuvers by U.S. companies, though on the other hand it discourages U.S. companies that are actually investing abroad from seeking to reduce their foreign tax liabilities. The details will be important in judging this more definitively.