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Why hasn’t a corporate tax overhaul taken place?

The Columbian
Published: September 27, 2014, 5:00pm

President Barack Obama’s announced crackdown on what he calls an unpatriotic move by U.S. corporations to shift their headquarters and tax bills to low-tax countries is raising the question of why the U.S. simply doesn’t cut its corporate tax rates to better compete with the likes of Ireland and other tax havens.

In fact, everyone in Washington actually says they want to lower and simplify U.S. corporate tax rates. But don’t hold your breath.

The White House and the Treasury Department put out a joint “white paper” in February 2012 titled “The President’s Framework for Business Tax Reform.” Before that, George W. Bush received a report on Nov. 1, 2005, from the President’s Advisory Panel on Federal Tax Reform. Both reports called for revamping the corporate tax code.

It hasn’t happened. And in the absence of change, some companies have taken advantage of the law by either acquiring or being acquired by companies abroad to move their headquarters to countries with lower tax rates. On Monday, the Obama administration announced new regulations aimed at curbing that practice but again joined the call for corporate tax restructuring.

“Comprehensive business tax reform … is the best way to address these transactions,” Treasury Secretary Jacob Lew said in announcing the measures late Monday that were taken in the absence of corporate tax reform.

Obama added in a statement that “I’ve called on Congress to lower our corporate tax rate, close wasteful loopholes and simplify the tax code for everyone.”

Not to be outdone, Michael Steel, spokesman for House Speaker John Boehner, R-Ohio, said the “answer is to simplify and reform our broken tax code to bring jobs home — and help grow our economy and create even more American jobs.”

“Everyone gives speeches about how the world will be better after we complete the process and have a new tax code. The problem is the process itself,” said Alex Brill, a research fellow at the American Enterprise Institute, a free-market research center. “How do we get into the negotiation? How do we get interested parties to sacrifice the goodies in exchange for the greater good? That’s a political question, not an economic question.”

Brill served as a White House staff economist during the Bush administration and later as policy director for the tax-writing House of Representatives Ways and Means Committee.

“Right now it really is very clear that it would be very difficult to conclude a tax-reform negotiation because not all the parties are at the table with a strong commitment to get something done,” Brill said. “The administration has not shown a strong commitment to business tax reform. They’ve talked about it.”

Political reason

There’s a good political reason that a corporate tax overhaul might not happen under Obama’s watch. In late 2012, he got a deal with Congress that raised the top tax rate for households with taxable income above $450,000, increasing it from 35 percent to 39.6 percent.

Corporate tax restructuring might undo it. That’s because about three-quarters of U.S. corporations don’t pay corporate income tax. Instead, their owners or shareholders claim the business income on their individual tax forms. It’s hard to do a corporate overhaul without opening up the individual tax code, something Obama is loath to do.

A successor, Republican or Democrat, might be more agreeable to this.

Another option, albeit unlikely, said Brill, is Congress agreeing on a definition that differentiates the business earnings of, say, doctors, lawyers, hedge fund managers and other high-income individuals from those of more conventional small businesses that are claimed by taxpayers filing their personal taxes.

The corporate tax rate went up to 35 percent under President Bill Clinton. It was part of a bipartisan deal that lowered the federal budget deficit and yielded a surplus. In a discussion Tuesday at his Clinton Global Initiative in New York, the former president said “we need to reform the tax system.”

When the rate went up, Clinton said, it was in order to get to the average of other rich nations.

“That average rate was then 35 percent, and we hit it bull’s-eye,” he said, adding that it also happened when corporations’ share of the tax burden had “dropped dramatically.”

Today other rich nations have lowered their rates. Only Japan has higher corporate taxes than the United States does. And American firms face another burden that their competitors do not.

“We have to come to terms (that) the world has stopped taxing the difference between what their companies earn in another country and in their own,” Clinton said of the trillions in earnings made abroad that U.S. corporations are choosing not to repatriate and subject to U.S. taxation.

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