Ditch the Corporate Tax

After two years that saw Congress passing and President Obama signing one big legislative initiative after another–the stimulus! health care (with bonus student loan reform)! financial reform!–the next two promise to be rather boring. With the House controlled by Republicans, and Harry M. Reid(D-N.V.) needing seven Republicans in order to break filibusters in the Senate, the chances of something major reaching Obama’s desk are slim indeed. This Congress instead will likely be characterized by long, arduous negotiations between the administration and the Republican leadership over spending. Whatever results will likely disappoint both parties, and be at most an incremental change from the status quo. The period of big, sweeping action, then, is mostly over.

There’s one big exception, however: corporate tax reform. In announcing his latest budget, Obama reiterated his support for revamping the tax, while Rep. David L. Camp(R-M.I.), the House Republican with jurisdiction on tax issues, has expressed interest in an overhaul of both the personal and corporate income taxes. The effort is far from settled. Obama has said he wants any reform to be revenue-neutral, whereas many Republicans, displaying just how much they actually care about cutting the deficit, have said they would only support reforms that cut revenue. But with the business lobby pushing hard for reform as well, there is reason to believe some package will be passed.

The approach Obama has proposed involves getting rid of various loopholes in the tax, and using the increased revenue to lower overall rates. As the U.S. has one of the highest corporate taxes in the world at the moment, this would presumably encourage corporations currently located overseas to move back to the U.S., and contribute more to the economy while here. Obama’s logic is sound so far as it goes, and he does have historical precedent. The bipartisan 1986 tax reform deal achieved a similar result with the personal income tax, reducing rates while eliminating a large number of deductions. However, this approach doesn’t go far enough. The best corporate tax reform would involve ditching the tax altogether.

For one thing, the tax is a haven for special-interest carve-outs, with different industries paying vastly different rates. While overhaul efforts like Obama’s can limit this, chances are, within a few Congresses, many of the carve-outs abolished in a reform will return after some lobbying. The corporate tax is also the easiest way for Congressmen to do favors for particular industries. While one could theoretically favor special industries in the personal income tax, most taxpayers do not itemize returns, meaning they do not benefit from special deductions, and thus that those carve-outs would be worth less. The only way to end this problem for good is to end corporate tax.

Liberals should also be concerned by the tax’s lack of progressivity. The money taxed by a corporate tax would have ended up in the hands of individual people, be it through compensation paid by the corporation itself, or that paid to companies which it pays for goods and services. Maybe the money taken by the tax would have just lined executives’ wallets, but it could be used to hire more low-income workers as well. The corporate tax is thus too blunt a tool to be reliably progressive. It would be better to wait until the money currently taken by the tax reaches individuals, and then to tax progressively.

Abolishing the corporate tax without making up the lost revenue–over $200 billion annually–elsewhere in the tax code would, of course, be foolish, especially given the long-term threat posed by the budget deficit. It would make a lot of sense to replace it with a tax punishing bad corporate behavior. For example, a financial transactions tax could prevent high-speed trading of the like that led to a minor stock market collapse last spring, while also raising considerable revenue. Alternately, a carbon tax would lead to serious reductions in emissions and be a start toward addressing climate change. Unfortunately, last Congress’ battles over financial reform and cap-and-trade climate legislation indicate that these are bridges too far for even a much more liberal Congress than the current one.

Raising the personal income tax, however, would likely be a palatable alternative. This has an intuitive appeal as a replacement measure. Repealing the corporate tax means individuals are going to be earning more through wages that would have otherwise been spent paying the corporate tax, and raising the personal income tax would allow the government to recoup some of those increased earnings. What’s more, a personal income tax hike focused on high earners would end up being more progressive than the corporate tax ever was. High corporate taxes could prevent a company from hiring working class people who really need the job. A tax bracket for millionaires might prevent a few families from buying third cars. I’d say that’s a fair trade.

So Obama should offer Republicans, and their corporate allies, a deal. If they agree to new tax brackets for the richest of the rich, he will support a total abolition of the corporate income tax. It’s so crazy, it just might work.

Dylan R. Matthews ‘12, a Crimson editorial writer, is currently studying abroad at Cambridge University. His column appears on alternate Tuesdays.