Some Perspective on Corporate Tax Loopholes

During last night’s State of the Union address – in addition to the unfortunate effort to “win the future” by demonizing oil companies – President Obama make a very encouraging announcement that he would back an effort to reform the federal corporate income tax. As the President alluded to, the U.S. corporate income tax rate will soon be the highest in the developed world, pending an announced rate reduction in Japan.

…over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change. (Applause.)

So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done. (Applause.)

Simplifying the tax code and lowering rates is certainly a good idea, but it’s important to have some context for the environment in which it’ll be happening. In Special Report No. 184, “Putting Corporate Tax ‘Loopholes’ In Perspective,” Tax Foundation President Scott Hodge takes on some of the conventional wisdom on business-related tax provisions:

Contrary to political rhetoric and public per­ception, the tax “loopholes” available to U.S. companies are not as generous or as costly as is often repeated. Indeed, the budgetary costs of the popular tax preferences available to individ­uals – such as the mortgage interest deduction, exclusion for employer-paid health insurance, and the exclusions for pensions and 401(k)s – are all larger than the $102 billion in budgetary costs of corporate tax expenditures. Surpris­ingly, even the tax expenditures that benefit state and local governments are almost as costly as are those benefiting the corporate sector.

In addition, the company and industry-specific tax provisions which the President is referring to only constitute a small portion of overall corporate tax expenditures. The majority consist of provisions that can be taken advantage of by any firm, and thus will likely be more politically difficult to eliminate. That doesn’t mean that Congress shouldn’t get to work on corporate tax reform, of course, only that they should go into the process with their eyes open.