There is a growing consensus in Washington that the time has come for comprehensive corporate tax reform. Such reform could be the most important economic policy decision Washington makes. Its effects would likely have critical implications for the health of the U.S. economy for years to come.
While there are a range of issues any comprehensive tax reform package will have to address (including how foreign source income is taxed and the differential tax treatment of interest vs. dividends) this report addresses just two central issues:
- the extent to which reform should be focused on broadening the base and reducing so-called tax “distortions” on strengthening tax incentives to drive certain types of corporate investments; and
- the extent to which reform should be revenue neutral or cost revenue (at least in the short term) in order to lower the effective U.S. corporate rate.
If Washington is to get this right, the debate over corporate tax reform needs to be vigorous and informed by analysis and reason. Unfortunately, much of what passes for corporate tax reform policy analysis is nothing more than ideological assertions and Washington groupthink. Even among groups with differing ideologies, there is near universal belief in tax code simplicity. For example, the notion that the best tax code is one that is neutral and “doesn’t pick winners” is so widely touted that it has become conventional wisdom, is no longer even questioned and crosses party lines. Case in point, the Obama Administration’s Economic Recovery Board report on tax reform which stated: “The combination of a high statutory rate and numerous deductions and exclusions results in an inefficient tax system that distorts corporate behavior in multiple ways.” The issue of revenue neutrality is also confined by groupthink and ignores a significant body of academic research about the effects of taxes on corporate behavior. Anyone with the temerity to argue that simplicity should not be the main goal of corporate tax reform (and that the effective corporate rate needs to be lower) runs the risk of being treated with derision and disdain.
This report argues that this conventional wisdom is wrong and that if corporate tax reform follows the path laid down by the holders of the Washington economic consensus the result will be less growth, fewer jobs and reduced U.S. economic competiveness. In a world of intense international economic competition and a U.S. economy increasingly powered by innovation, a tax code that does not proactively “distort” the investment decisions of enterprises in the United States is one that is doomed to leave the United States behind in international competition. In fact, we are virtually the only nation in the world where the consensus is for eliminating, rather than expanding, incentives for business investment in innovation, capital equipment and machinery.
Rather, than a tax co