The Corporate Income Tax

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"The Corporate Income Tax"

David Leonhardt has a piece explaining the horrors of the American corporate income tax code, which manages to have both higher rates than almost any other developed country and also raises less revenue. Why? So many loopholes. Doing it that way, meanwhile, harms economic growth:

The problem with the current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company — and that are indeed inefficient for the larger economy — can make sense when they bring a big tax break. “Companies should be making investments based on their commercial potential,” as Aswath Damodaran, a finance professor at New York University, says, “not for tax reasons.”

Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success.

So even though powerful vested interests will want to hold on to their breaks, there’s at least a strong lobby out there pressing for pro-growth reform, right? Well no:

The official position of the Business Roundtable, one of the most important corporate lobbying groups, is telling. The Roundtable says it supports corporate tax reform. But it actually favors only a reduction in the tax rate. The group refuses to say whether it also favors a reduction of loopholes. In effect, the Roundtable wants a tax cut for its members regardless of how much the tax code is simplified — or whether the budget deficit grows.

Now in principle there’s no particularly special reason that corporate income tax reform needs to be revenue neutral. You could make up the lost revenue with higher income taxes, or higher estate taxes, or higher gasoline taxes, or what have you. But of course business lobbies don’t support any of those options either. And yet revenue is currently near its lowest point in decades, even as the elderly share of the population is set to grow increasing demands for health care and pension services. We need more tax money, not less, and ideally we need to raise it in an economically efficient way. Instead the political system only seems to be be able to push rates down and expand loopholes.

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