Daily Austerity Watch: Obama’s Corporate Tax Gamble

According to Politico, the Administration is proposing to tackle corporate tax reform.  Lobbyists in the nation’s capitol must have thought Christmas came early this year.    Treasury Secretary Timothy Geithner is expected to unveil a white paper that calls for “lowering the top corporate tax rate from the current 35 percent to less than 30 percent and as low as 26 percent.”   The only way to pay for the cut will be to trim exemptions and close loopholes such as accelerated depreciation for  capital equipment.    Geither is personally leading talks with Republicans on the issue, the website says.

There are a couple of problems with this notion.  First, the case that U.S. corporations are overtaxed is a weak one.    As the liberal blog Firedoglake points out, U.S. corporate taxes equaled about 1.3% of GDP last year while many countries collect more than double that rate.  Thanks to loopholes, the effective tax rate paid y many companies is far lower than the statutory one.  A 2008 GAO study found that 55 percent of U.S. companies paid no corporate taxes in one out of seven years,  according to a recent New York Times report.

Past attempts to reform the U.S. tax code have ended in dismal failures, and there is no  reason to believe this one will be any different.   Take the 1986 Tax Reform Act.    Passed under the leadership of then House Speaker Dan Rostenkowki (D-IL), the law was supposed to make the tax code simpler and fairer.  It slashed the top rate for individuals from 50 percent and eliminated tax breaks that shifted an estimated $120 billion in tax liability to corporations over 5 years.  It created tons of headaches.

The Act, in fact, was so flawed, that Congress had to enact another law to fix its flaws.  The Philadelphia Inquirer won a Pulitzer Prize detailing the shenanigans that went on as Congress carved out billions of exemptions for well-heeled corporations and individual taxpayers.  It is nauseating to contemplate 25 years later.

There were provisions that accorded special treatment not available under either old or new tax laws. There were provisions that excused taxpayers from complying with IRS or court decisions holding them liable for payment of taxes. And there were provisions that merely granted exemptions from the tax law – licenses, if you will, not to pay taxes.There were provisions that accorded special treatment not available under either old or new tax laws. There were provisions that excused taxpayers from complying with IRS or court decisions holding them liable for payment of taxes. And there were provisions that merely granted exemptions from the tax law – licenses, if you will, not to pay taxes.

Washington rarely learns from its mistakes and is bound to repeat the mistakes of 1986.   Corporations in industries ranging from big oil to big pharma to big tech will argue that their tax breaks are vital to their bottom lines.  Remember that, like in the real  world, when one loophole is closed another one opens.

A few points of history are in order.   President Ronald Reagan, though he championed small government, actually raised taxes 11 times.  The debt hit $3 trillion, up from $700 billion during his administration.  Fast forward to the Clinton years.  In 1993, Congress enacted one of the biggest tax hikes in U.S. history.  That, along with Republican-lead efforts to control spending, lead to the creation of the go-go 1990s.  Let’s not forget that there was a surplus — you read that right — in 2000 of $237 billion.   Of course, the country’s deficit ballooned again under Presidents George W. Bush and Barack Obama. It now stands at $1 trillion.

In short, tax increases are not necessarily an impediment to economic growth. As Congress readies to debate extending the debt ceiling and various plans to tackle the deficit,  it needs an open, honest debate over the Tax Code, which is too complicated and overly burdensome to some.   Unfortunately, the cure may be worse than the disease.

–Jonathan Berr