TPA 2014 Wish List: Corporate Tax Reform

The end of year is getting closer and Congress is moving quickly to deal with any business they deem too important to let slip into 2014, include a budget deal where more than  300 House members bust the sequester caps for the next two years. The Senate will adjourn later this week and Congress won’t return until early January. There is a long list of to-do items that elected officials in DC will have to deal with when they come back. One item in particular that TPA has been focusing on and hoping that Congress will too is tax reform. Specifically, there is much that can be done to benefit taxpayers, consumers, and businesses by making a real move toward corporate tax reform.

The corporate tax rate in the United States is effectively the largest in the world and it is a dubious distinction that we have held for more than a year. Lowering the corporate tax rate is an area where all sides recognize the benefits it would have to the economy and the chorus for action has been growing as more and more evidence is presented to show just how advantageous reforming the corporate tax structure could actually be if accomplished. A study published earlier this year from Ernest & Young revealed exactly why the economy is in dire need of corporate tax reform:

• The average statutory foreign corporate tax rate of the 19 countries analyzed will have fallen nearly 35 percent between 1988 and 2015, when all currently scheduled changes will be fully in effect.
• U.S. GDP is estimated to be between 1.2 percent and 2.0 percent smaller in 2013 because of the high U.S. corporate tax rate relative to the reductions in corporate tax rates enacted abroad beginning in 1988.
• In the long run, the U.S. economy, as measured by GDP, is estimated to be smaller by between 1.5 percent and 2.6 percent if the current differences in corporate tax rates remain.
• In today’s $15.7 trillion economy, the long run impact on the U.S. economy is equivalent to a reduction in U.S. GDP of about $235 billion to $345 billion each year.
• In 2013 real wages will be about 0.1 percent to 0.3 percent lower than they would have been otherwise.
• In the long run, real wages would be about 1.0 percent to 1.2 percent lower than they would have been otherwise.

Unfortunately, there are those who are looking to blunt momentum towards reforming the corporate tax and just recently a left-of-center think tank, The Center for Effective Government, released a study showing that some of the highest-taxed companies added nearly four-times as many jobs over a five-year period than did their counterparts that had a small tax bill. TPA looked at the study and here are some important things to consider when taking their findings into account in the debate on corporate tax reform:

• The time frame for the study is 2008 – 2012, a period of abysmal job creation for the economy as a whole due to the housing crash and financial collapse that led to a severe recession. This calls into question the sample as misrepresentative of both tax rates and job creation in a long-term outlook.
• The effective tax rates of many corporations vary widely year to year. This is due to increased spending in some years on things like R&D, which is a tax credit, can lower the effective tax rate. Other years when things like R&D spending are lower the effective tax rate will be higher.
• The study refers to a “Tax Holiday” in 2005 that they claim didn’t create jobs. However, this comparison doesn’t hold since that tax holiday was on offshore profits. Those profits were earned offshore because that’s where the businesses were. Just re-patriating profits won’t automatically lead to job increases.

Looking ahead to 2014, there appears to be optimism on the goal of tax reform for the coming year, with Congressional action a real possibility. House Budget Committee Chairman Paul Ryan (R-Wis.) sounded very bullish on the matter while speaking to David Gregory on NBC’s “Meet the Press” on December 15:

“Watch the Ways and Means Committee in the first quarter of next year. We’re going to be advancing tax reform legislation, because we think that’s a key ingredient to getting people back to work, to increasing take-home pay and to growing this economy.”

This past year saw some encouraging moves with regard to tax reform and specifically reforming the corporate tax structure. Earlier this summer Senator Max Baucus (D-Mont.) and Rep. Dave Camp (R-Mich.), chairmen of the tax-writing committees in the Senate and House, hit the road to find out what Americans thought about the tax code and talked to folks multiple cities on their ‘tax tour’. TPA was also encouraged by the work of the RATE Coalition and happy to be a part of their efforts on corporate tax reform. Now, with momentum and the issue still fresh in the minds of elected officials and policy-makers, the coming year is prime for more meaningful work and hopefully the goal of corporate tax reform can be achieved.