It’s good that tax reform is high on the political agenda these days.
In fact, there is increasing bipartisan agreement that corporate rates are too high, and need to be lowered just to stay even with our competitors abroad.
But the issue of corporate tax reform has been in the spotlight before and it is more complex than either conservatives or progressives make it, according to Peggy Wood, president of the New York State Society of CPAs.
Speaking at a briefing on corporate tax reform, Wood noted that those who favor “simply cutting the rate without doing away with corporate tax breaks and deductions say our high corporate tax rate restricts the U.S. from being fully competitive in today’s global economy, that it dissuades foreign corporations from setting up shop in the U.S.”
Those on the other side of the argument acknowledge that the tax rate is high, but say that with tax breaks and creative tax planning, the average effective rate on corporate income is in line with other countries’ rates.
Nevertheless, economists on both sides of the political spectrum believe that the consequences of not lowering our corporate rates will be a loss of revenue to other countries. “When a corporation is looking to set up operations, if tax is the only factor, the U.S. may not be high on the list,” said Larry Keiser, CPA, a partner with Stern Keiser & Panken LLP and a member of several NYSSCPA Tax Division committees.
Even though it’s not the statutory marginal tax rates, but the marginal effective tax rate (what businesses pay after they take advantage of all the credits and deductions in a country’s tax code) that matters, by most measures our effective rate is still right up there with the highest in the world. And that hinders the economy from creating jobs necessary to grow.
“The fastest way to get the marginal effective rate down is to lower the statutory rate,” said Curtis Dubay, senior policy analyst at the Heritage Foundation. “Our high rate is killing the economy because it is driving new investment, and the jobs that come with it, overseas.”
Unfortunately, my guess is that despite the consensus that something needs to be done, it won’t be easy. That’s because any significant reduction in rates will also significantly lower revenue for the Treasury, at a time when debt and deficits are at a tipping point. This is true even if the impact is measured by the “dynamic” method of scoring, which takes into account the change in behavior brought about by cutting the tax rate. And the solution, while obvious, will be bitter medicine. It involves cutting spending.
“This is the corner we painted ourselves into: we must lower the corporate tax rate to save the economy, but we cannot afford the revenue loss to do it,” said Dubay. “We’ll get an agreement when our politicians realize we can’t fix our budgetary mess without economic growth, and when they catch on to what lawmakers in other countries realized over 20 years ago, which is that a lower corporate tax rate is essential for economic growth.”
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