The real story is more complicated because so many loopholes mean that few businesses pay the top rate. That problem suggests a solution: pay for a lower tax rate with a broader base. Close some big, expensive, wasteful loopholes and use the revenue to buy off some points on the rate.
President Obama has a plan that would take the rate down to 28 percent that way, and Republican Rep. Dave Camp (Mich.) offered a plan that went down to 25 percent. As an editorial in The Washington Post correctly points out, those rates aren’t too far apart creating a “partisan gap [that] is hardly unbridgeable.”
Not so fast.
Camp’s reform was DOA on the afternoon he introduced it, and its death was not at the hand of Democrats; Camp’s own party killed it. Same with the president’s plan. Other than his staff, no one even talks about it.
To be fair, there’s a historically accurate adage in D.C. that tax reform is absolutely out-of-the-question impossible until it suddenly isn’t. But when it comes to corporate tax reform, most everyone seems to be missing the real roadblock. It’s actually not D’s and R’s, who as noted, are not all that far apart (yes, I’m leaving out the extreme obstructionists who won’t agree on anything, but I don’t think they’re the problem here either).
It’s the businesses that don’t want to lose the tax benefits their loopholes provide. If you look across industries, you see a wide range of effective corporate tax rates, ranging from single-digit rates in utilities, industrial machinery and telecom to much higher rates in domestic industries such as food services, retail and health care.
The nature of the loopholes explains the spread. Multinationals have much deeper tax avoidance options than purely domestic operations. Accelerated depreciation represents a big tax break for certain manufacturers. The huge tax preferences for debt financing (over equity) hold down the tax bills of highly leveraged financial firms.
I’m not saying political partisans are all holding hands and singing “Kumbaya” over corporate reform. But watching this unfold — or fail to unfold — over the years has convinced me that we have a rare case in which the blockage is not coming from substantive or ideological differences in the policy. It’s coming from the deep pockets of the industries that are far more interested in protecting their tax breaks than they are in reforming this part of the code.
Unless policymakers are willing to stand up to them, it’s awfully hard to see a path forward on corporate tax reform in this or any other Congress that’s beholden to contributions from those with a vested interest in protecting the status quo.