But, lowering the corporation tax rate is not easy for a few reasons including:
- For revenue neutrality, as required by President Obama and others, some tax breaks will go away. However, the deductions often noted for repeal are not used only by corporations. These include the Section 199 manufacturing deduction, lower-of-cost-or-market inventory valuation and LIFO.
- Once the corporate tax rate is reduced, some businesses will likely shift to C corporate form if it lowers the income. This would include sole proprietors and passthroughs with income levels that get taxed at the individual top rates (particularly when this goes back to 39.6% after 2012). This happened after the Tax Reform Act of 1986, only in the opposite direction. That is, when the individual rate dropped below the top corporate rate, there was a tremendous growth in S corporations (chart). How will this affect the revenue estimates and how low the corporate rate can go?
- Discussions of lowering any tax rate often lead to questions (a good thing) about just how the system really works today. At recent hearings in the tax-writing committees on tax reform, it was noted that some businesses are quite large, but are not C corporations. Comments were made that perhaps all or more businesses should be taxed as C corporations. As I noted in a 3/24/11 post, that led Senator Snowe to introduce S. Res. 88 saying that businesses should be free to select their own entity form. A May 1 article by Reuters - "U.S. mulls making more firms pay corporate tax" notes that President Obama is considering taxing businesses with gross receipts over $50 million as C corporations. That means that all of the business income would be taxed at ordinary rates (no lower rate on capital gains), double taxation, different rules for contributions, and a few other differences. The article says that a formal proposal is forthcoming. So, a plan to lower the corporate tax rate might look a lot different than originally expected.
- Will the public buy in? Articles about very low effective corporate tax rates likely don't sit well with the public. See my 4/5/11 post.
- Will a lower corporate tax rate require the 2001/2003/2010 tax cuts to be made permanent? If yes, how will it all be paid for?
- Is a lower corporate tax rate the solution to the problem? What is the "problem"? The US tax system is out-of-date relative to other countries in several ways including its worldwide tax system (rather than territorial) and double taxation of corporations. Also, other countries with the lower corporate tax rates have a national VAT. Does the existence of the national VAT enable a lower corporate tax rate? Does the fact that a VAT is border-adjustable help other countries (that is, the VAT is owed on imports, but not exports)? Wider tax reform discussion is needed if we are really going to move our tax system into the 21st century!
What do you think?