Revenue-Positive Reform of the Corporate Income Tax

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Center for Tax Justice PDF:

Revenue-Positive Reform of the Corporate Income Tax

Close Corporate Tax Loopholes — But Don’t Give the Revenue Back to Corporations as a Rate Cut

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Revenue-neutrality is the wrong goal. Corporate tax reform could involve some small reduction in the corporate tax rate, but overall corporate tax reform should be revenue-positive, so that it can reduce the budget deficit.

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1. U.S. corporations pay a smaller percentage of their profits in taxes than do corporations based in other developed nations. Corporate leaders and anti-tax politicians often point to the top statutory corporate tax rate in the U.S. — 35 percent — which is higher than that of most other countries. But because there are so many deductions, credits and other special breaks in our corporate income tax, the effective tax rate for U.S. corporations is actually relatively low. In 2007, a report from the Bush Treasury found that “the United States takes a below-average share of corporate income in taxes.” The report found that, over the 2000-2005 period, U.S. corporations paid 13.4 percent of their profits in corporate income taxes, while the corporations of the other countries in the Organization of Economic Cooperation and Development (OECD) paid 16.1 percent of their profits in corporate income taxes.3

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5. President Obama should follow Ronald Reagan’s example by raising income taxes on corporations that currently pay little or nothing,and substantially increasing overall corporateincome tax payments. The idea of a revenue-neutral tax reform is not entirely absurd. The Tax Reform Act of 1986, which reformed both personal and corporate income taxes, was revenue neutral overall and was still a great accomplishment. But it’s important to note that the 1986 reform act was not revenue-neutral for corporations. In fact, despite lowering the statutory corporate tax rate from 46 percent to 34 percent, the 1986 act closed so many corporate loopholes that, it increased corporate income taxes by more than a third! A revenue-neutral corporate tax reform was not appropriate in 1986 because corporate tax avoidance had run rampant, and as President Ronald Reagan pointed out, corporations were not coming close to paying their fair share in taxes.

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Reagan’s corporate tax reforms worked, for quite a while. But today, with the help of subsequent Presidents and Congress, corporate tax avoidance has again gone wild and General Electric is again paying no federal income tax. Meanwhile — and not unrelated — long term budget deficits and lack of revenue are among our nation’s greatest problems. In this situation, revenue-neutral corporate tax revenue is even less appropriate than it would have been in 1986.

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Here are some of the most significant loopholes and special breaks that corporations enjoy and that Congress should eliminate.

Deferral of Taxes on Income of U.S.-Controlled Corporations Abroad
2011-2015 cost: $199 billion

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Accelerated Depreciation on Equipment
2011-2015 cost: $141 billion

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Deduction for Domestic Manufacturing
2011-2015 cost: $76.7 billion

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Last-In, First-Out Accounting (LIFO)
2011-2015 cost: $24.2 billion

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Fossil Fuel Production Breaks
2011-2015 cost of largest three: $10 billion

more

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That's 251.9 billion. Close the loopholes. Reform the individual tax code and do the same.

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