Thursday, February 23, 2012

Bigger tax reform deal easier than smaller?

Steve Bell makes the point that a corporate tax reform is best done alongside a reform of the individual income tax code as well. President Obama released a proposal for corporate tax reform yesterday that seems to have been viewed cautiously as a reasonable step in many quarters that signals interest in tax reform while acknowledging that a big step like that is doubtful before the 2012 election.

It adopts the proposed rate of 28% (down from 35%) suggested by the Fiscal Commission. It is instructive that focusing on the politically charged issues related to oil and gas companies and private jets can only reduce the rate so much. Going lower would require more fundamental changes in how corporations are able to deduct the expenses of doing business.

I have suggested ending the corporate income tax and simply treating dividends and capital gains as normal income, which would represent a large increase in the tax rate for these sources of income for high income persons. The logic of having a lower tax rate on capital gains and dividends is that corporations have already been taxed. However, if we were going to take a huge step like ending, or seriously lowering the corporate income tax, it would only make sense to do so along side an overhaul of the individual tax code to make sure ending/lowering the corporate tax rate doesn't simply drive more use of deductions, credits and exemptions in our current personal income tax code to shield corporate income (think: all the aspects of the current schedule C).

Regardless of what proposal you prefer on corporate tax reform, a key fact to keep in mind is that such taxes have only raised between 10-13% of total federal receipts (~2-3% of GDP) for the past 30 years. It has not been a huge source of federal revenue for some time, and I doubt it ever will be again.

No comments:

Post a Comment