Tax Reform Hearing Spurs Deep Congressional Rift
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The Fiscal Times
January 20, 2011

Legislators from both sides of the aisle offered support for reform of the loophole-ridden individual and corporate income tax code Thursday at the first major congressional hearing of the year on the topic. Not surprisingly, how to achieve that lofty goal broke down along ideological and partisan lines.

The major focus of the House Ways and Means Committee hearing was the corporate income tax rate, which business groups claim puts the U.S. at a disadvantage in attracting investment. Members of the Republican majority asserted sharply lower rates for corporations will lower the trillion-dollar budget deficit by increasing domestic investment. “Many of us believe a decrease in rates will increase revenue to the federal government,” said Rep. Tom Price, R-Ga.

Minority Democrats dismissed that claim as discredited supply-side economics. “How much more should the U.S. borrow from the Chinese so that some corporation can pay less?” said Rep. Lloyd Doggett, D-Tex.

Jump-starting Hiring Vs. Lowering the Deficit
A top business leader who testified before the committee tacitly admitted corporate tax reform would reduce government revenues. Procter and Gamble chief executive officer Robert McDonald, who was representing major multinational firms belonging to the Business Roundtable, said lowering rates for companies should take precedence over immediate steps to lower the federal deficit. “Let’s prioritize getting to a competitive system,” he said. “I’m not sure it will actually be revenue neutral.”

President Obama has embraced corporate tax reform as part of his expanding campaign to woo business leaders and find ways to get companies hiring again. But the need to lower the nation’s trillion-dollar deficit stands in the way of reducing business taxes. Treasury Secretary Timothy Geithner laid out the administration’s opening position last week after a series of meetings with corporate chief executives and chief financial officers. The administration would endorse “lower rates but no loss in revenue,” Geithner said.

Achieving lower rates while raising the same level of revenue requires what tax experts call base broadening, progressives call loophole closing and some businesses and many Republicans call tax increases. Whatever the measures are called, they’re not easy to achieve since base broadening creates winners and losers, with the latter deploying small armies of K Street lobbyists to make sure their special corporate loopholes are continued.

One expert who testified Thursday argued significant base broadening would need to take place to ensure reduced corporate rates did not increase the deficit. Martin Sullivan, a corporate tax expert and contributing editor at Tax Analysts, argued that all special corporate tax breaks in the code should be eliminated to erase the tax code’s impact on economic activity and to deal with the nation’s growing budget gap. “To say tax cuts pay for themselves is largely wishful thinking,” he said.

Kevin Hassett of the American Enterprise Institute endorsed the Republican approach. “In the corporate tax space, it is possible to increase revenue by lowering rates,” he said. In response to questioning, he estimated a 30 percent corporate tax rate, down five percentage points from the current rate, would generate the same revenue as the current rate due to increased economic activity.

While there is widespread interest in tax reform, the political clock doesn’t favor reform in this session of Congress. The last major overhaul of the tax code was in 1986, after President Ronald Reagan had successfully won a second term in office. While the discussions that led to those revenue neutral reforms began in earnest three years earlier, they succeeded only because both individuals and businesses got lower rates in exchange for closing loopholes for business.

Many analysts are hoping the current debate over corporate tax reform will widen into a broader debate over the tax and budget reforms needed to address the nation’s long-term deficit problem. Two prominent veterans of the budget wars, former Senate Budget Committee chairman Pete V. Domenici, R-N.M., and former White House budget director Alice Rivlin — said Wednesday that tax reform could be what’s needed to get Democrats and Republicans working together on a long-term plan.

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.