The Rough Road to a 28 Percent Corporate Tax Rate
A preliminary report from the Joint Committee on Taxation sheds light on what a system with a revenue neutral corporate rate reduction might look like.
November 10, 2011
The call for lowering the corporate income tax rate has received so much attention in the last few years, that it almost seems a given that the rate will drop. Proponents of a lower rate include President Obama, members of Congress, presidential candidates and many corporations. Several of these proposals have the caveat that the reduction be part of a revenue-neutral plan.
What has been absent in this discussion is the details of what a revenue-neutral package might look like and just how low the corporate rate can be reduced in such a plan. On October 27, 2011, the Joint Committee on Taxation (JCT) released "very preliminary" tables to provide a glimpse into what it will take to lower the rate.
This article summarizes the recent JCT data and what it means for the prospects of corporate-tax reform. Questions that need to be answered in developing a complete and realistic plan to reduce the corporate tax rate are noted as well.
Proposals for a specific, lower corporate income rate include one released October 26, 2011 by House Ways and Means (HWM) Committee Chair Camp (Comprehensive Tax Reform at the HWM website). His plan, the Tax Reform Act of 2011, calls for a 25 percent corporate tax rate. The preliminary plan includes numerous international tax changes, most notably, moving to a territorial system. Individual tax changes, additional corporate changes and other reforms are intended to be provided at a later date.
Presidential candidates Jon Huntsman and Mitt Romney have called for a 25 percent top corporate rate and Rick Perry suggests 20 percent. President Obama has also called for a reduction in the corporate rate in a revenue-neutral manner (with no specific rate called for). (See Pushing for Specifics on Tax Reform Proposals)
The JCT tables released October 27, 2011 list existing tax expenditures in the same order they appear in the annual tax expenditures report that JCT released. Two sets of tables are provided. Table #11-1 133 shows the revenue effect of repealing provisions that all types of businesses (not only corporations) claim. Table #11-1 134 shows only the revenue effect of not allowing corporations to claim the special tax provisions. Several lines of each table indicate that the data is not currently available. The JCT data also shows the "cost" of lowering the corporate rate to a flat 28 percent. The summary data for a 10-year period covering 2012 to 2021 reveals:
|Cost of reducing the corporate rate to 28 percent||$717.5B|
|Revenue gain if expenditures are repealed for:|
Thus, the revenue neutral rate achievable is 28 percent. To achieve a lower rate, other tax changes are needed, most likely the ones affecting taxpayers other than C corporations. While the preliminary data may look promising for a rate reduction to be feasible, there are several missing pieces and potential roadblocks that might make even a revenue-neutral 28 percent rate (let along a 20 percent rate) unfeasible.
Cautions, Obstacles and Areas for Further Study
No doubt, finding roughly $71 billion dollars annually to support a 28 percent corporate tax rate will be challenging and some may want to see an even lower rate or a low rate with special incentives, such as for depreciation and R&D (requiring more revenue offsets). With the numerous changes needed for revenue neutral reform, consideration should also be given to more significant reform, such as some form of consumption tax in place of the corporate income tax. For example, in a 2007 report, Treasury described a business activity tax (BAT), a type of consumption tax, to replace the income tax for all forms of business (see reference list below). The 2005 final report of President Bush's Advisory Panel on Federal Tax Reform included a proposal for a Growth and Investment Tax Plan, with some consumption tax elements.
Another consideration is that over 140 countries use a value-added tax (VAT) at the national level. Perhaps the presence of a VAT, in addition to the income tax, enables these countries to have a lower corporate tax rate.
The JCT report, although still preliminary and in need of more data, is a welcome addition to today's tax reform discussion. It will help identify appropriate changes to enable a revenue-neutral change. The discussions generated will also likely include important issues of whether all businesses should be taxed the same, how international tax reform ties in, what other changes are needed for U.S. businesses to be competitive in the global marketplace and how principles of good tax policy, such as simplicity, neutrality and equity, can be met in a reformed federal tax system.
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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the AICPA, ABA and California State Bar. She chairs the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.