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Where's Your Corporate Income Tax Reform Plan, Mr. President?
Last night in the "State of the Union," President Obama had this to say about corporate income tax reform:
“Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.
“So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years – without adding to our deficit.
This is great news, as far as it goes. If President Obama wants to lower our corporate income tax rate (the highest in the developed world at nearly 40 percent), that's great. ATR would be happy to work with him on it and support a good product.
There's just one problem--there's no plan. A hope, an aspiration, a goal is not the same thing as a plan.
The White House now has an obligation to come up with their plan for corporate income tax reform, and we look forward to seeing it. We hope it maintains the following principles:
- The rate needs to come down--way down. Our 40 percent rate is much higher than the average European rate of 25 percent. Ideally, we'd want to be under that in order to attract jobs and capital from the rest of the world
- Don't raise taxes. The President has argued this should be a tax revenue-neutral exercise. While we would prefer a net tax cut (at least on paper in a static score), revenue-neutrality should be the worst revenue case. This should not be an excuse to raise net taxes (like the President's Debt Commission did).
- Move from "worldwide" to "territorial" taxation. As part of reform, the corporate tax system should migrate away from "worldwide" taxation (where all income of U.S. companies from all around the world is liable to be taxed by the IRS) to "territorial" taxation (where only U.S.-source income is taxed). This is what the rest of the world by and large does, and would make all the international deferrals and credits unnecessary.
- Resist the temptation to lengthen depreciation lives. The proper tax treatment of business purchases is immediate expensing (as was contained in the December tax deal). Going in the other direction by lengthening depreciation lives will only bias toward consumption and away from productive investment.. It's the government picking winners and losers, and hurting economic growth in the process.
- Remember that the corporate income tax is only the first act of a two-act play. After-tax corporate profits distributed to shareholders are double-taxed as dividends. After-tax corporate profits retained by firms eventually come out in the wash as taxable capital gains to shareholders. An integration of both bites at the apple would truly be a pro-growth and comprehensive tax reform effort on the corporate side.
- Don't forget about corporate capital gains and dividends received. Unlike individuals, corporations don't have a preferential rate on capital gains, and cannot exclude all the dividends received from other corporations. Dealing with the capital stock and portfolio income of corporations is a necessary component to reform.
- Don't pick winners and losers. President Obama seems to have a particular vitriol reserved for energy companies, as exemplified (again) in his SOTU speech. This hatred should not cause this sector to suffer more base broadening than other sectors. Conversely, favored companies should not get light treatment. Rather, the goal of a revenue-neutral corporate tax reform (as opposed to a simple rate cut, which remains ATR's preference) should be to broaden the base as much as possible in order to lower the rates as much as possible. How individual companies or sectors do is not particularly-relevant.