Corporate Tax Reform Should Focus on Rate Reduction

Curtis Dubay /

The United States will soon have the highest corporate tax rate in the world once Japan enacts its pledge to cut its rate. This dishonorable distinction is driving both Washington lawmakers and the business community to finally call for long-overdue reform.

Politico reports that Treasury Secretary Timothy Geithner will release the Obama Administration’s plan for corporate tax reform in the coming weeks. There are many outlines the plan could take, because there are so many problems with the corporate tax code that need fixing. But no matter what form the plan takes, its centerpiece should be a greatly reduced rate.

The high rate is the biggest factor driving businesses to locate new investment in other, more competitive countries. This is costing the U.S. jobs and slowing economic growth.

The Administration’s plan should lower the corporate tax rate so it is on par with the average in other industrialized nations in the Organization for Economic Cooperation and Development to put the U.S. on equal footing with its global competitors. That average stands at 25 percent today, well below the U.S. rate, which is above 39 percent (35 percent at the federal level plus the almost 5 percent on average that states tax businesses).

Lowering the rate reduces tax revenue, according to the budget rules directing Congress. That’s why the Administration’s plan will likely offer a lower rate coupled with an expanded tax base by eliminating certain deductions and credits (what many refer to as “closing loopholes”) to make up for any revenue lost through the rate cut.

This is where reform gets both tricky and dangerous. If the plan rids the tax code of the wrong provisions, it could end up doing more harm than good—even with a reduced rate.

The most damaging “loopholes” to close would be any provisions that allow businesses to deduct the cost of capital purchases faster than the cumbersome depreciation system in place now. Such provisions are not loopholes and are an important part of sound tax policy.

Proper tax treatment for capital purchases would allow all businesses to fully deduct the costs of those expenditures when they occur. Our depreciation system raises the cost of capital for businesses, which hampers wage increases and job creation. The Administration’s plan should leave in place provisions that move the tax code away from the depreciation system. Ideally, the plan would also include full expensing for all businesses.

With deficits of the magnitude that President Obama has called for in his budget, there will be pressure to use this corporate tax reform effort to raise more revenue. The plan will be a tax increase if would raise more revenue than the current tax code would if left in place. Congress should not be tricked into accepting a tax increase for a lower rate.

Tax hikes are not the right solution to reduce the deficit. The deficit is a result of Congress spending too much, not taxing us too little. If the plan submitted by Geithner raises revenue, Congress should fix this by lowering the rate to ensure that America’s businesses don’t have their taxes raised.