The Case For Revenue-Raising Corporate Tax Reform

Treasury Secretary Tim Geithner is meeting today with a group of corporate CFO’s to discuss corporate tax reform, as talk heats up on Capitol Hill of a wider tax reform effort. The goal, should the administration pursue corporate tax reform, is to rework a corporate code that has a high statutory rate compared to the rest of the industrialized world, but is so riddled with loopholes and giveaways that many corporations pay little to no corporate income tax. The corporate tax code is both inefficient and encourages tax-dodging.

The administration has pledged that corporate tax reform, if it occurs, will be revenue-neutral, meaning any reduction in rates must be accompanied by a corresponding elimination of loopholes and other junk, so that the overall amount of corporate tax revenue doesn’t fall. However, as the Washington Post’s Lori Montgomery noted today, revenue-neutral reform makes such action “virtually useless as a method of deficit reduction.”

Indeed, there’s no reason that corporate tax reform be deficit-neutral: it should raise additional revenue! As the Center on Budget and Policy Priorities noted, “large disparities in the treatment of different types of corporate investment create opportunities for reforms that could be revenue neutral — or even raise revenue — while at the same time improving economic efficiency.”

At the moment, the U.S. raises less corporate tax revenue than most developed countries, due to its inefficient and loophole-riddlen corporate code. According to the Office of Management and Budget, “corporate tax receipts will account for just 7.2% of federal revenues in 2010, with large corporations contributing less than one-sixth as much as small business and individual taxpayers to the Federal Treasury.” Fifty years ago, corporate tax receipts were 23 percent of federal revenue, and “and individual income tax payments were less than twice those of large corporations’ tax payments.”

Of course, Republicans will oppose any effort to increase corporate revenue, even if it means that the corporate tax code has a lower-rate and is easier to navigate. But with the U.S. facing large, structural deficits for years to come, failing to grab the opportunity to raise revenue — while still making the corporate income tax more efficient and aligned toward productive investment (instead of tax preferential activities) — would be irresponsible, and mean that more of the deficit-reduction burden will have come via other tax increases or cuts to important and popular programs. The era in which Exxon and General Electric pay no income taxes in the United States and Google’s tax rate hovers at 2.4 percent should end, if those companies want an easier tax code with which to work.