Everyone wants to cut the corporate income tax rate.
That's one of the few areas of real common ground in American tax policy. Obama wants a flat rate of 28 percent, down from the current 35 percent top rate. Romney wants to push it even lower, to 25 percent, as does House Ways and Means chair David Camp. All three major bipartisan tax reform plans — Bowles-Simpson, Domenici-Rivlin and Wyden-Coats — include a corporate rate cut, to 28 percent, 27 percent, and 24 percent respectively. And all of these plans would pay for the cuts by closing loopholes.
But what does "closing loopholes" actually mean in this context? The Committee for a Responsible Federal Budget has a helpful report laying out the big ticket items that you'd need to cut to lower the corporate tax rate. All told, the report finds that you can reduce the rate almost 10 percentage points — to 25.1 percent — by eliminating deductions, and further still if you change the treatment of income companies earn in other countries. They even built a fun calculator to show how much different policy changes let you cut the rate.
The easiest deductions to cut are the ones that target specific industries, like credit unions, corporate jets, or Blue Cross/Blue Shield (yes, BCBS has its own deduction). But eliminating those only allows a rate cut of about three-quarters of a percentage point.
Unsurprisingly, you need to touch more popular tax breaks to afford real rate reduction. The biggest is a provision called "accelerated depreciation". This policy is meant to give businesses an incentive to purchase equipment, buildings, and other goods.
Suppose a newspaper company buys a $10,000 printing press it expects to use for 10 years. Normally when the company pays taxes, that cost is spread out evenly over the period when the press is used, so it gets to count $1,000 in expenses for each of those 10 years. But accelerated depreciation lets it speed that up — say, by counting $2,000 in expenses for each of the first five years the press is used. The total tax benefit is the same, but accelerated depreciation lets businesses claim more of it in the first few years after they buy something.
That makes it more attractive for companies to buy stuff, but it's expensive. Getting rid of it raises enough revenue to cut the corporate tax rate 5.28 points, to about 30 percent. That's why Simpson-Bowles and Wyden-Coats would both get rid of it. Romney hasn't said much on the issue, while Obama has proposed actually increasing the benefit for small businesses. But chances are they'd both have to limit it, at least for large companies, to finance lower rates.
The other major area where change is likely is in how income that U.S, companies earn overseas is treated. Currently that money is subject to tax, but only when companies bring it back to the United States. That gives corporations an incentive to stash money abroad. There are two main alternatives. One, endorsed by both Romney and Simpson-Bowles, would totally exempt money earned overseas from US tax. That's called a "territorial" system. Adopting one would reduce revenue, but advocates argue it would spur growth in the long-run by encouraging companies to bring money earned abroad into the United States.
The other option, embraced by Wyden-Coats, is a true "worldwide" system, in which overseas profits are taxed as they're earned, not just when they're brought back to the United States. That gets rid of the incentive to keep money abroad, but it could also curtail U.S. companies' foreign operations. In its strongest form, CRFB estimates that a worldwide system could bring in enough revenue to cut the corporate rate by 4.25 points.
So if you want to lower rates, you need to target accelerated depreciation and overseas income. But there's an economic case for actually expanding both accelerated depreciation and exempting more overseas income. If a "cut the loopholes and lower the rates" approach is going to work, the economic benefits of a rate cut have to outweigh the costs of doing away with the most costly - and most economically valuable - tax breaks.
If you want to play around with those tradeoffs in more detail, check out CRFB's calculator. It's a lot of fun!