Proposed tax reform might be best answer


The following editorial appeared in the Baltimore Sun on Feb. 23:

Experience teaches us that proposals to “simplify” taxes ought to be viewed with skepticism. From Steve Forbes’ flat tax of 1996 to Herman Cain’s recent 9-9-9 proposal, efforts to make taxes simpler have usually meant — at least when held up to closer scrutiny — shifting the budgetary burden from the rich to the middle class.

But what President Barack Obama revealed last week appears to be a far more reasonable attempt to reduce the nation’s corporate tax rate from 35 percent to 28 percent (and allowing manufacturers an even lower 25 percent) by closing existing loopholes, many of them outrageously unfair, anti-competitive and burdensome to the economy.

Lowering the corporate tax rate has been a mantra of Wall Street and the U.S. Chamber of Commerce for years. But while the U.S. corporate tax rate is among the highest in the world, the net collected is not. Among the G-7, for instance, the U.S. government’s corporate tax collections as a share of total revenue are only slightly higher than the average, with Canada and Japan collecting substantially more.

That’s because U.S. corporations have lobbied for decades for loopholes that allow them to shield income and have hired a veritable army of accountants and lawyers to devise new ways to take advantage of them. So the U.S. corporate tax rate of 35 percent may look high, but in practice, major firms never pay anything close to that. Many, like General Electric find ways to pay nothing at all, even in years when they are returning huge profits to investors.

That’s hardly a model of efficiency and effectiveness. Lowering and simplifying the tax rate would surely free businesses to focus on what they do best — providing goods and services — instead of investing so much time and energy in tax avoidance.

But, as so often happens in tax policy, the devil is in the details. The shift will inevitably create winners and losers in the corporate world. Those companies that stand to lose particularly lucrative exemptions are likely to vigorously oppose the measure — or unleash on Congress that other bane of government decision-making, the well-paid lobbyist.

Treasury Secretary Timothy F. Geithner appears to have crafted a proposal that’s likely to appeal far more to Democratic and independent voters than the kind of drastic lowering of net corporate tax collections that Republicans tend to prefer. The payoff for this more balanced approach is that it would allow the United States to collect billions of dollars more each year, revenue badly needed if Congress wants to get serious about reducing the nation’s debt.

That’s a point made most explicitly by the National Commission on Fiscal Responsibility and Reform chaired by Democrat Erskine Bowles and Republican Alan Simpson. Two years ago, the panel recommended an overhaul of the U.S. tax code that would not only lower rates but raise net revenue in order the trim the deficit.

House Republicans are likely to balk at the plan, particularly in an election year. They’ve already expressed a preference for reducing the rate to 25 percent without offsets — that is to say, they want to lower the rates but keep the loopholes. Newt Gingrich wants to lower the rate to 15 percent, and others in the GOP presidential race might go further (with even more disastrous results for deficit reduction).

But as much as Republican leadership will complain that Mr. Obama’s proposal is not enough, they will have to acknowledge that the general goal of simplifying the corporate tax code is something the two parties now have in common. The proposal may not go far in Congress this year, but the chances of reform after November now seem much greater.

Still, it won’t be easy. A lot of loopholes, such as write-offs for certain types of capital investment and research, are extremely popular. And special interest groups have always shown great skill at persuading Congress to create or preserve tax exemptions.

But compared to reforming Medicare or Social Security, bringing some common sense to corporate tax policy ought to be a walk in the park. If in doubt, Congress need only allow each loophole to rise or fall on its own on a separate vote. If reforms can survive that test — and still allow the country to reduce the deficit — then President Obama and Congress might actually deliver what the nation needs: a simpler and fairer tax code.