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Government: Building the case for corporate tax reform

August 30, 2011 |  7:00 am

Third Way logo Although they don't agree on the details, top Republicans and Democrats in Washington have endorsed the idea of federal tax reform as a sort of bipartisan win-win. The basic idea is to broaden the base by cutting down on loopholes, exemptions and credits, raising more money (bringing cheers from Democrats) while lowering marginal rates (causing Republicans to wave their pom-poms).

Tuesday, the centrist think-tank Third Way added its voice to the growing chorus, releasing the first in a series of policy papers advocating corporate tax reform. The paper lays out a broad case for change, arguing that the current system is inefficient, uncompetitive and a drag on economic growth.

Among its points:

  • At 35%, the top U.S. corporate tax bracket will soon be the highest among the world's major industrialized nations. This rate is so far above what other countries collect, it discourages multinational businesses from expanding in the United States.
  • U.S. law encourages domestic companies to evade taxation by locating facilities or moving intellectual property overseas, and discourages them from investing the profits they generate overseas back in the United States.
  • Multinationals devote substantial profits to tax-avoidance schemes instead of putting them to productive use. This investment enables certain kinds of large companies to reduce their tax burdens, while smaller competitors are stuck paying a higher effective rate.

These are good arguments, but the effort faces substantial hurdles. For starters, any effort to make the system more fair and equitable by simplifying it and broadening the base will generate losers along with the winners. That's why there will be an army of lobbyists defending every loophole, exemption, twist and turn in the code.

The deal to raise the debt ceiling gave the Joint Select Committee on Deficit Reduction -- the so-called "super committee" -- a significant amount of power to plow through such opposition, as well as a strong incentive to reduce the budget deficit through tax reform. But the committee has precious little time; it's recommendations are due by late November.

Ryan McConaghy, coauthor of the report and director of Third Way's economic studies, suggested that the committee could try to come to an agreement on a tax-reform goal while leaving the details for Congress to work out over the coming year or more. That could take the form of something akin to a reconciliation instruction, with the tax-writing committees obligated to find the means to achieve the goal the super committee set.

That would be no walk in the park, however. Even if they agree on the need for overhauling the code, Republicans and Democrats are far apart on the trade-off between reducing the deficit and lowering marginal tax rates.

RELATED:

Jerry Brown's corporate tax shuffle

About those folks who don't pay taxes....

Is it time to reform the tax code?

-- Jon Healey

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