Tax Reform Should Focus On Improving Competitiveness
June 22, 2015
There is universal recognition in Washington that the 35 percent federal corporate tax rate is out of step with our global competitors and should be lowered in order to improve U.S. competitiveness and economic growth, with a common target of 25 percent.
While corporate-only tax reform may appear to be less complicated and more expeditious than comprehensive reform, there are reasons to believe that the goal of revenue neutrality and economic growth are at odds with each other.
- People overestimate the number of "loopholes" in the corporate tax code. The static cost of cutting the corporate tax rate to 25 percent averages about $126 billion per year over ten years. However, the total amount of corporate tax expenditures averages about $180 billion per year, $80 billion of which is the cost of deferral.
- Many corporate tax expenditures are also available to pass-through businesses such as S-corporations and partnerships. Eliminating these provisions to finance corporate-only reform would effectively raise taxes on pass-through firms without any corresponding reduction in there tax rates.
- Cutting the corporate tax rate to 25 percent would certainly boost economic growth. However, the negative economic effects of eliminating many of these corporate tax preferences would negate all of the growth generated by the rate cut.
Lowering the 35 percent federal corporate tax rate to 26.3 percent with no offsets would increase the level of GDP by more than 2 percent over the next decade and, over the long-term, would also recover much of the static revenue loss. However, while there is a strong desire among many lawmakers to offset a rate cut with a broadening of the corporate tax base, there are both practical and economic challenges with such a tradeoff. The lesson from this is that lawmakers would do well to put a priority on generating economic growth and improving U.S. competitiveness rather than maintaining static revenue neutrality.
Source: Scott A. Hodge, "The Challenges of Corporate-Only Revenue Neutral Tax Reform," Tax Foundation, June 18, 2015.
Browse more articles on Tax and Spending Issues