On April 1, the tax rate for U.S. corporations will go from second highest to the highest tax rate in the world. That’s when Japan will lower its rate by five points from its current 39.5 percent.
The President’s corporate tax reform plan would correct this. Rates would be lowered from 35 percent to 28 percent. This is a step in the right direction, except for the fact that some corporations would end up paying more than they do now as a result of the elimination of certain tax breaks.
Unfortunately, tax reform in this election year is extremely unlikely despite talk of bipartisan support. But what if lower rates could be legislated separately from an overall tax reform? And what will happen if rates aren’t lowered?
Japan’s case provides a glimpse into what it means to be last in the tax friendliness race.
In the decade between 2000 and 2011, Japan lost 39 Fortune Global 500 company headquarters. The U.S. did even worse, losing 46 Fortune Global 500 companies HQs in the same span of time.
“Leading the world with the highest corporate tax rate and an overly complicated Tax Code is not a distinction we wish to have,” said Elaine Kamarck, a lecturer in public policy at Harvard’s Kennedy School of Government, a former advisor to President Bill Clinton and Vice President Al Gore, and the Democratic co-chair of the RATE [Reforming America’s Taxes Equitably] Coalition. “Reforming the corporate Tax Code has wide bipartisan support and the momentum is there to get the job done and help create jobs in this country.”
However, she added, it is unlikely that the corporate rate can be lowered separately from a wider tax reform. “While it doesn’t bring in as much revenue as before, it still brings in a fair chunk, 7 to 13 percent of total revenue,” she observed. “But it’s still a big chunk, and we’re in an era where people are worried about deficits, so it’s hard to imagine a cut that’s not almost revenue neutral.”
While she agrees that 2013 is more likely for any kind of legislation, she believes that it might be possible to pass something this year.
“There is a growing consensus in Washington that we will have tax reform on the agenda in 2013,” she said. “But we actually think that there is a possibility we could do the corporate tax reform in 2012.”
There are two reasons for this, she noted. “First, the two parties are actually very close on the outlines of the bill. The While House put out a proposal for a 28 percent rate, paid for by closing various loopholes, and the Republicans put out their proposal for a 25 percent rate, paid for by closing various loopholes. You can see the outlines of a deal.”
“The second reason is that Congress passed with nary a whisper, the extension of the payroll deduction and unemployment compensation,” she added. “We think that politicians are feeling the anger of the people in not getting something done, and this is something that’s viewed as a deliverable to voters who are unhappy with the gridlock in Washington.”
Although critics have noted that many corporations would pay more in tax under the President’s reform proposal because of the elimination of various tax breaks, Kamarck said that many would rather have a simplified tax system. “The argument goes beyond the bottom line of the tax rate,” she said. “It goes to a sense that simplicity and predictability are good for business.”
“Complex tax codes of industry-specific provisions are bad not only for individual business but for the overall economy,” Kamarck added. “This view is shared by both sides of the aisle, which is why we feel this is a pretty logical first step into what we see as a larger step into overall tax reform.”
