October 03, 2012

The Committee for a Responsible Federal Budget (CRFB), a bipartisan, non-profit organization made up of some of the nation's leading budget experts, last week released Reforming the Corporate Tax Code, a working paper focused on the need for corporate tax reform and how to pay for it. The paper makes the case that the United States has the highest corporate tax rate in the developed world and there is a growing consensus of lawmakers, economists, and business leaders that the U.S. corporate system needs retooling, with an emphasis on lowering the corporate tax rate and broadening the tax base.

According to the report, reducing the corporate tax rate to 25 percent—a stated goal of many members of Congress, including House Ways and Means Committee Chairman David Camp (R-MI)—would cost close to $1.1 trillion dollars. Approaches that Congress could take to offset the costs of tax rate reductions, the paper suggests, include eliminating many tax provisions that benefit only one or a few industries. While acknowledging that, “some of these tax expenditures may have important justifications,” the report concludes that, “they can also lead to an unequal playing field where the government is picking winners and losers.”

The report cites the Housing Credit as an example of such preferences along with preferences for the oil and gas industries, the exemption of credit union income, and the Blue Cross/Blue Shield deduction. In a chart identifying 25 different corporate tax expenditures which if eliminated could yield a total rate reduction of 9.9 percent, the Housing Credit is listed as the fifth largest revenue-raising corporate tax expenditure with the potential to yield a 0.25 percent rate reduction upon elimination. The exclusion of interest on private activity bonds is listed 14th with the potential to yield a rate reduction of 0.07 percent.

Other potential sources of revenue cited in the paper include eliminating broad deductions and credits that offer preferential treatment but tend to benefit a wide range of industries, such as the research and experimentation tax credit; reforming the international tax system; reducing the deductibility of some costs considered to be ordinary business expenses, such as interest costs and the costs of meals and entertainment; and cutting tax expenditures within the individual income tax code.

A corporate tax reform calculator accompanying the paper allows users to see how adding or reducing various tax expenditures could affect the corporate tax rate.