Obama's Next Target: Corporate Tax Loopholes
The Obama administration is moving forward with corporate tax reform proposals and, although it’s too early to judge, many of them look pretty good at first blush.
At minimum, the Obama administration’s fundamental idea—reducing America’s highest-in-the-G8 statutory marginal corporate tax rates—is a good one. High tax rates scare away investors and are particularly bad for unsophisticated enterprises that come up with a wildly innovative product or service. (Exactly the kind of businesses one wants to encourage.) To reduce the tax rates without destroying overall revenue, however, the Obama administration is going to propose a variety of things it will call “loophole closures.”
In doing this, there are three major types of “loopholes” that the administration will propose eliminating and, for those who want a better, fairer, tax code that treats all like enterprises more-or-less the same, certain rules-of-thumb for dealing with each of them make sense. In particular, changes to broad tax code features, elimination of bona fide revenue expenditures, and tax increases on disfavored (mostly foreign) companies deserve different types of analysis.
First, broad tax code features that tend to reduce tax owed for enormous numbers of enterprises—things like expensing of capital equipment and credits against research and development costs—deserve evaluation on their own terms and should be matched as closely as possible with marginal rate cuts if they’re made less valuable. Some of these broad features may be helpful to the economy while others may simply distort the way revenue gets collected. Changing them offers the greatest hope of reducing marginal rates on most enterprises without destroying the government’s overall revenue collection ability but eliminating them, even in concert with a marginal rate cut, shouldn’t be seen as an excuse to “sneak by” a large tax increase.
Narrow revenue expenditures that benefit only a handful of firms—things like credits for ethanol producers, solar power companies, and certain types of farmers—have economic consequences a lot more like spending than tax cuts. Although they’re collectively not big enough to make a huge difference, they should have to meet pretty high standards of efficacy to avoid elimination in a broad tax reform. After all, they’re simply favors handed out via the tax code. Since they don’t impact the overwhelming majority of enterprises, even a lower-tax policy should accept eliminating them altogether without an offsetting cut somewhere else.
Finally, stealth tax increases disguised as “loophole closers for foreign firms” deserve enormous skepticism. Trade protectionists, who have more than a few friends in the administration, want to use the tax code to impose all sorts of taxes on their offshore competitors. Almost without exception, these deserve rejection. (If offshore firms as a whole really pay too little tax—which doesn’t seem to be the case—the proper response would be to raise the federal excise tax on all transactions involving foreign-owned enterprise.)
The Obama administration, at minimum, is saying the right things about corporate tax policy. When the specifics of their plan come out, they’ll need careful analysis.
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