Do Companies Want Special Tax Favors, or Good Tax Policy?

May 10, 2006

A common perception among lawmakers is that companies don’t care about good tax policy. If forced to choose between broad-based, low-rate, neutral taxes, or special targeted tax incentives that benefit only their company, conventional wisdom is that companies prefer targeted tax carve-outs every time.

But this is often not true. Many large companies are well aware of the dual-edged nature of special targeted tax incentives. Tax preferences designed to boost corporate investment may provide short-term advantages to some companies—and allow lawmakers to take credit for new jobs in campaign speeches—but in the long run they add enormous complexity to the code, and ultimately transform the tax system into an economic minefield of narrow bases and punitively high rates.

More than anyone, large companies wrestle with staggeringly complex tax returns. They realize that the never-ending stream of targeted tax incentives from Congress leads to ever-rising costs of complying with the corporate income tax. And ultimately, it forces up tax rates to make up for lost revenue. Better to move in the opposite direction: clean up the tax base, lower rates, and let markets determine companies’ investment decisions, not tax writers on Capitol Hill.

Consider the following from yesterday’s House Ways and Means Committee hearings. It’s from the testimony of Matthew McKenna, Senior Vice President of Finance at PepsiCo.

In it, he makes a strong case for base-broadening, rate-reducing corporate tax reform—that is, he makes the case for sound tax policy—not the targeted tax credits embraced by many lawmakers:

For U.S. companies to continue to be competitive with companies that reside in other large industrialized nations, and to foster foreign direct investment in the U.S., the corporate federal income tax rate should be reduced.

A lower corporate tax rate would allow businesses to operate in a more efficient manner, enhance certainty for business planning purposes and ensure that strategic decisions are driven by productivity, profitability and growth concerns as opposed to the preferences and obstacles of the tax code.

Expensing versus lower corporate tax rate The President’s Advisory Panel on Federal Tax Reform proposed an option that would provide immediate expensing for capital assets as a means of encouraging economic investment. Capital investment clearly is important to the growth and expansion of U.S. businesses…

However, if I were given a choice between increased expensing and a reduction in the corporate tax rate, my preference would be a lower tax rate…

Credits and other tax preferences versus lower corporate tax rate The current U.S. tax code provides a variety of incentives to businesses through credits and other preferences, and PepsiCo benefits from many of these credits and preferences.

Nevertheless, if I were asked to choose between increased credits and other preferences or a lower corporate tax rate, again I would choose the lower tax rate.

As noted above, a reduction in the corporate tax rate would allow businesses to determine for themselves how best to deploy their earnings in order to maximize returns to the business and to the shareholders.

(Read the full testimony here.)

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