The release of the 2013 White House budget Monday will provide fresh grist for the fiscal policy debate in Washington as lawmakers look to balance short-term stimulus measures and the economic recovery with long-term deficit reduction and a spiraling national debt. One issue where Republicans and Democrats may be able to find common ground, analysts say, is on corporate tax reform. Both parties have acknowledged shortcomings in the current corporate tax code and support a reduction in the U.S. statutory rate as a way to increase the global competitiveness of U.S. corporations (PDF). Lowering the corporate rate and closing loopholes, or base broadening, may also provide a higher level of federal revenues. But disagreement remains on several issues, including the way U.S. multinationals are taxed on foreign profits.
What's at Stake
Corporate taxation is currently the third-largest source of federal income (PDF), fluctuating around 10 percent of all revenues, or 2 percent of GDP, in recent years. Tax breaks enacted to help drive the recovery have kept corporate income tax receipts at unusually low levels for the past three years, averaging just 1.2 percent of GDP--although the Congressional Budget Office expects this number to more than double by 2014 (PDF).
The United States has a comparatively high statutory corporate tax rate--39.2 percent (including state taxes) versus an OECD weighted average of 25.5 percent. But the effective corporate tax rate--the ratio that companies actually pay after leveraging a myriad of tax "loopholes"--will soon average around 26 percent, up from a forty-year low of 12.1 percent in 2011, due to new regulations (TIME).
Still, business groups contend they are at a disadvantage in the global marketplace because they often face a higher effective rate than foreign competitors. The United States also taxes the foreign income of its firms, unlike most other large economies, encouraging many U.S. companies to keep their profits overseas to avoid the cost of repatriation. A high U.S. rate may incentivize U.S. firms to move operations overseas altogether (NAF), taking valuable jobs with them.
The White House supports deficit-neutral policy proposals that reflect cutting the statutory rate while broadening the corporate tax base. President Obama's 2013 budget (PDF) specifically calls on Congress "to immediately begin work on corporate tax reform that will close loopholes, lower the overall rate, encourage investment here at home, and not add a dime to the deficit." In his 2012 State of the Union, the president also proposed that every multinational corporation pay a basic minimum tax that would prevent some companies from avoiding most of their tax burden.
Republicans support a cutting and base-broadening strategy, but would also like to move the United States to a territorial tax system and exempt U.S. companies from paying taxes on overseas earnings. Critics of this policy contend it would preference foreign over domestic investment and effectively export U.S. jobs overseas.
Any cut to the statutory rate should be tied to inducements for firms to invest rather than simply pocket the profit, writes Bruce Stokes for the National Journal. Incentivizing companies to invest some of their tax savings into bonds issued by a national infrastructure bank would do so and help rebuild the nation's eroding roads, rails, and water systems, Stokes writes.
A policy brief for the Peterson Institute for International Economics recommends the implementation of a broad-based consumption tax to replace the high statutory corporate tax rates. Such a tax would be akin to the value-added tax or the goods and services tax used as the primary means of taxing consumption in every OECD country except the United States.
Lawmakers should exempt U.S. firms from paying taxes on profits repatriated from foreign countries with an effective corporate tax rate of 20 percent or higher, writes Harvard's Robert C. Pozen for Bloomberg. According to Pozen, such a measure would encourage the payment of reasonable taxes and limit companies' ability to exploit tax shelter countries like the Cayman Islands.
This report from the Congressional Research Service examines the central issues involved in corporate tax reform and provides potential revisions to the tax code.
In the New York Times, David Leonhardt writes that the U.S. corporate tax code is "the worst of all worlds," with its high rate and numerous loopholes. He argues the system makes compliance inefficient and expensive, and ultimately slows economic growth.