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Tuesday, January 29, 2008

Corporate Tax Under the Microscope

2007 was a year of examining our corporate income tax system and considering alternatives -- but only as a preliminary step to further discussions and debate.

The US combined federal and state corporate tax rate is one of the highest among industrialized countries due to reforms in those countries in the past several years. Many believe that lowering the federal income tax rate on corporations would help make U.S. companies more competitive in the global market. House Ways & Means Committee Chairman Charles Rangel included a corporate rate reduction in his "mother of all tax reform" bills (H.R. 3970) introduced in October 2007. That bill also included some base broadening to help pay for a lower tax rate.

But, there are many issues to consider:

  1. Should the analysis only look at the statutory tax rates or the effective tax rate (tax as a percentage of income)? Many U.S. corporations have ETRs below the statutory rate.
  2. Corporate tax revenues are already declining. What would be the effect on the budget and economy of lowering tax rates further?
  3. Should a rate reduction be offset to make it revenue neutral? Some say no because the rate drop will lead to greater investment and revenue, others (including a recent report by the Congressional Research Service) say yes.
  4. Unlike many other countries, a lot of business income in the U.S. is subject to the individual income tax rather than the corporate income tax because we have so many sole proprietorships and flow-through entities. Would corporate reform alone help businesses be more competitive?

For more information and a link to several studies and reports released in 2007, please see Corporate Tax Under the Microscope.

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