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.
Domenici and Rivlin said there is near universal support in Congress and among many interest groups for overhauling the federal tax code. “It could indeed be the solvent that makes the way possible for Democrats and Republicans to come together,” said Domenici. “It hasn’t done that yet, but, I tell you, when you sit around and talk about that tax code – reform it and fix it – it just becomes exciting, and I think it will become exciting to the players in the House and Senate under the leadership of the president.”
Rivlin, a senior fellow at the Brookings Institution who headed the Office of Management and Budget during the Clinton administration, and Domenici, who has been involved in budget and tax deals dating back to the Reagan administration, co-chaired the Bipartisan Policy Center’s Debt Reduction Task Force that last November offered a comprehensive plan for reducing the long-term debt. Rivlin also served on the presidential National Commission on Fiscal Responsibility and Reform, which issued a separate set of recommendations in early December, including calls for major overhaul of the tax code and elimination of many popular tax breaks.
Ripe for Tax Reform
Rivlin said that the political climate around tax reform may have changed, providing more opportunities for reforms than in 1986, when Congress passed legislation to simplify the tax code, broaden the tax base and eliminate many tax shelters.“That was a modest reform compared to what we are proposing here,” Rivlin said. “We’re saying blow up the income tax system and start over. That is an opportunity, we think, to have a much simpler, more pro-growth tax code that actually raises more money. And there is more of a bipartisan interest in that, and simplification is something that could really sell, if we could really do it.”
The Bipartisan Policy Center task force proposed a radically simplified individual income tax that would lower tax rates, broaden the base and eliminate the need for millions of households to file tax returns. The plan would end or reduce many popular deductions and credits like the home mortgage deduction and health insurance tax exclusion and simplify those that remain so that they will be more effective and better targeted.
Their plan also called for a new national “Debt Reduction Sales Tax” to supplement the income tax. The presidential deficit commission, meanwhile, offered an equally dramatic rewriting of individual and corporate tax laws – including measures that would bring corporate tax law more in line with those of U.S. international trading partners.
Both commissions recommended a temporary payroll tax holiday for 2011 to stimulate the economy, a measure that was embraced by President Obama and congressional Republicans as part of a major tax and stimulus deal approved last month during a lame duck session of Congress. “The payroll tax holiday was a good move,” Rivlin said. “We wish it was bigger.”
Domenici and Rivlin met with reporters Wednesday to urge Obama to take a strong stand in his State of the Union address for dealing with the long term debt, but said it would be a mistake to impose deep cuts in domestic programs now as the country struggles with persistently high unemployment and a slow economic recovery.
“It would be a disaster to slash spending now,” Rivlin said. “But we need to work together on a deficit reduction plan that phases in over the next few years that doesn’t derail the recovery — but that reassures our creditors.”
What Will It Take to Reform the Tax System (Brookings Institution)
Obama Orders Federal Agencies to Review Regulations (Washington Post)
Tax Overhaul Can’t Be Piecemeal (Reuters)