Miracles Can Happen: Corporate Tax Reform Edition

March 30, 2011

The tax news and analysis organization Tax Analysts held a panel in DC last Friday entitled “Corporate Tax Reform: Is it in the Air?” The speakers touched on many issues regarding corporate tax reform, including the administrative, economic, and political hurdles that need to be overcome.

While other options (such as a VAT) were discussed, the dialogue centered around tax reform that would broaden the base of the current corporate income tax and lower the rates, though not necessarily in a revenue neutral fashion.

A few themes continued to surface during the discussion. One had to do with non-corporate businesses, which are not required to pay the corporate income tax. For these “flow-through” businesses, the business income is passed forward to the business owners who pay income tax on that income through the individual income tax. The speakers agreed that flow-through business need to be brought into the reform discussion in order to ensure that any reform is comprehensive and effective. But they also noted that this makes the reform more difficult, as many of these are small businesses, which have a lot of political influence.

And regarding politics, David Wessel of the Wall Street Journal noted that the politics of corporate tax reform are especially difficult. Fundamental tax reform is often misunderstood by voters and misrepresented by opponents. It is a common perception that corporations are not paying a fair share, and while some corporations would pay more, revenue neutral corporate tax reform would reduce taxes for some other companies. It is up to the experts to convincingly explain why this is a good idea.

Wessel also noted one perennial problem in public policy: the losers from productive, revenue neutral corporate tax reform (i.e. those who will lose their special tax benefits) have a huge incentive to fight against it, while the winners, of whom there are likely to be many more, don’t each individually have enough incentive to fight in favor of the reform. In other words, the costs of reform are concentrated with a few while the benefits are spread over many. And the few have a lot of power and a lot to lose.

With this and so many other hurdles in the way, the outlook for fundamental tax reform can sometimes appear gloomy. Indeed, the tone at the Tax Analysts’ meeting was at times downright pessimistic. As for how fundamental corporate tax reform can possibly be accomplished, the most telling portion of the discussion came when panelist Martin Sullivan of Tax Analysts offered a few encouraging words to everyone in the room: “Miracles can happen, and miracles will have to happen.”

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