What ‘A Beautiful Mind’ Can Teach Us About Corporate Tax Reform

David Williams

March 21, 2014

A key scene in the 2001 film “A Beautiful Mind” portrays the famous economist John Nash devising a new strategy to pick up girls and in the process developing a core tenet of game theory, which would later lead him to win a Nobel Prize.  This theory posits that in any sort of strategic interaction, the best outcome of the group depends on the choices of all the players, not just the optimal choice of one player.  While corporate tax reform is hardly as alluring as picking up girls at a bar, the film’s scene is an apt metaphor for the dynamics and challenges of the tax reform discussions going on today.

Most companies agree that the statutory tax rate should be lowered to 25% in exchange for cutting loopholes and subsidies.  They also are seeking out the most attractive deal possible.  But compromise on a plan is a Sisyphean challenge because the best deal for one company may only come at the expensive of another company’s loss.  Because it is so hard to make every stakeholder happy in the negotiation process, the solution to date has been to effectively do nothing.

It is clear that the United States economy as whole and individual companies with headquarters within our borders would be better off with comprehensive tax reform.   At 39%, the United States currently has the high statutory corporate tax amongst all OECD nations.  While countries like Japan and the United Kingdom have recently lowered their national tax burden on domestic companies, the United States has not followed suit. America’s outdated, overcomplicated tax code and high rates limit the ability of U.S. companies to invest, hire and grow.  Consequently, U.S. companies are less competitive in the global marketplace.  According to a new report from the U.S. Public Interest Research Group, this has led to an exodus of firms moving offshore, costing $20.7 billion in corporate tax revenue in 2011 alone.

Fortunately, the dynamics of the situation soon may change as due to the recent release of Chairman Camp’s draft tax reform legislation Camp’s Chairman Camp’s leadership is starting to frame the discussion in terms of economic growth, competitiveness, and job creation.

Any strategic plan will have to include a reduction in the current statutory rate and a broadening of the base.  The components of the plan will have to be structured to be revenue-neutral and produce equilibrium. While plenty of obstacles stand in the way of tax reform, every step towards it helps to engender strategic interaction between interested companies and politicians and leads to more education and discussion.  Understanding motivations and outcomes of all the players is incredibly important and tax reform must make the majority of American companies better off.  The tax code right now may be far from beautiful, but the reforms that are being discussed may be a solution that even a beautiful mind can appreciate.