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February 2012, Week 4

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Thu, 23 Feb 2012 20:23:54 -0500
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Corporate Tax Reform: Be Careful What You Wish For

by Jared Bernstein

On the Economy - Facts, Thoughts and Commentary by Jared
Bernstein
February 22, 2012

http://jaredbernsteinblog.com/corporate-tax-reform-be-careful-what-you-wish-for/

Pretty much every discussion of tax reform these days ends
with an agreement that we need to broaden the base and lower
the rates.  Well, the White House today will release the
broad outlines of a plan to do just that on the corporate
side of the federal tax code.

According to advance info from this AM's NYT, the proposal
will be to cut the current top corporate rate of 35% down to
28%, and to close a bunch of loopholes to make up the
difference.   Some other features include:

* a lower rate - 25% - for manufacturers;

* a minimum tax rate on foreign earnings to discourage tax
sheltering by multinationals;

* added incentives for R&D (probably making that tax credit
permanent, something the admin has long supported) and clean
energy investments;

* a bunch of other loophole closures...

And therein lies the rub.  It is widely recognized that many
corporations already pay far less than the statutory rate -
from the WaPo story on the proposal:

    Today, the U.S. corporate tax rate of 35 percent is one
    of the highest in the world, but an abundance of
    loopholes and deductions means that many companies pay
    far less than that  -  or nothing at all. Companies in
    the United States pay almost half the taxes than
    companies do in other rich countries, compared to the
    size of the economy, according to the Organization for
    Economic Cooperation and Development.

Last I checked, we were collecting around 1.3% of GDP in
revenue from the corporate sector.  That's low both in our
own historical terms (the average has been about 2% over the
past few decades) and especially in international terms,
despite the fact that we have a higher statutory rate.  And
it's not just the recession depressing corp revenues, though
that's part of it, because corporate profitability is once
again soaring.

This tells you two things.  First, a lot of companies take
advantage of the breaks in the code and second, getting to a
revenue-neutral 28% will mean taking away a lot of those
goodies.

Some of the biggies are accelerated depreciation, interest
deductibility, the ability to pass corporate capital gains
over to the individual side of the code (where it gets
favorable treatment), and a bunch of international
loopholes, like deferral - the ability to avoid US taxation
by holding multinational profits overseas.

I don't think today's release will go into much detail on
specifics but the implication is clear: if those who have
been clamoring for a lower corporate rate are serious, they
need to step up and support these loophole closures.

In that sense, the White House's proposal creates an
interesting political challenge.  For years now, American
corporations and their reps here in DC have been calling for
a lower rate while at the same time availing themselves of
billions in tax breaks that have kept them from paying the
statutory rate.   In my debates with supply-siders, they're
all about the rate...they're happy to trade more base for
points off of the rate.  In the next chapter of this debate,
we'll get to see how much they meant it.

Everyone loves the first part of the mantra: lower the
rates.  Now let's see how the feel about the second part:
broaden the base.

[Jared Bernstein joined the Center on Budget and Policy
Priorities in May 2011 as a Senior Fellow.  From 2009 to
2011, Bernstein was the Chief Economist and Economic Adviser
to Vice President Joe Biden, executive director of the White
House Task Force on the Middle Class, and a member of
President Obama's economic team.

Bernstein's areas of expertise include federal and state
economic and fiscal policies, income inequality and
mobility, trends in employment and earnings, international
comparisons, and the analysis of financial and housing
markets.

Prior to joining the Obama administration, Bernstein was a
senior economist and the director of the Living Standards
Program at the Economic Policy Institute in Washington, D.C.

Between 1995 and 1996, he held the post of deputy chief
economist at the U.S. Department of Labor.]

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