There is good reason to be wary of Max Baucus and Orrin Hatch’s plan for “blank slate” reform of the individual income tax. But when it comes to the corporate income tax, this approach to reform could be a great opportunity – if it is used to raise substantial revenues.
The corporate income tax is one of the most progressive pieces of our tax code, with the vast majority of the tax borne by wealthy investors. But over the last 50 years, corporate taxes have declined as a share of federal revenues, reducing the progressivity of the tax code overall. The statutory top corporate tax rate is 35 percent, but the code is so riddled with loopholes and special preferences that corporations now pay an average effective tax rate of 12.6 percent — less than many middle class families.
That means that “blank slate” tax reform that wiped out all corporate tax expenditures – the loopholes and special breaks that allow companies to avoid the statutory tax rate – could raise a lot of revenue very progressively while both enhancing efficiency and protecting middle-class families from tax increases and damaging spending cuts. In fact, just repealing one large tax expenditure known as “deferral,” the provision that allows companies like Apple to use offshore subsidiaries to classify their profits as “foreign” and indefinitely avoid U.S. taxes, would raise more than half of the revenue called for in the Senate Budget Resolution.
Yet instead, corporate lobbyists are lining up to tell Congress that corporate reform should be “revenue neutral.” They say the U.S. should lock in the low effective rates corporations have achieved through past lobbying and accounting games, and that even as we are kicking kids off head start and furloughing nurses for returning veterans, corporations should not be asked to contribute any more to our nation’s fiscal needs. Worse, multinationals are pushing for a so-called “territorial” tax system, under which they would never owe tax on any profits they could characterize as overseas. This would magnify the problems created by deferral and potentially lead to even more erosion of the corporate tax base in the future.
Policymakers should use tax reform to make the code simpler and fairer for the middle class and to raise revenue for investments in the middle class. A corporate “blank slate” provides the perfect opportunity to do all three, raising substantial revenue in a very progressive way by stripping away years of accumulated loopholes and tax breaks and making it harder for multinationals to avoid U.S. taxes through offshore activities. But to achieve these goals, Congress must stand firm in the face of an onslaught of lobbyists and demand that corporate reform fix the fundamental problem with our corporate tax system: corporations aren’t paying their fair share.
Kitty Richards is the Associate Director for Tax Policy at the Center for American Progress Action Fund.