Last Hope for Bipartisanship: Corporate Tax Reform?

On the surface, corporate tax reform seems like an obvious place for Democrats and Republicans to work together next year. We have the second highest corporate tax rate in the world, at 35 percent, but we collect an relatively small chunk of revenue.

The White House has expressed support for lower rates and fewer deductions. Key Republicans have signed on. Democratic Sen. Ron Wyden and Republican Sen. Judd Gregg have already penned legislation that would dramatically reform the way we tax companies. Speaking at an event in DC last month, Wyden said he thought tax reform could be the one issue to break the partisan gridlock.

So who would hold up corporate tax reform?

It might be the corporations, themselves. Now I know you're thinking, What corporation would object to a law that lowered its taxes? Maybe, Google.

Two weeks ago, Bloomberg reported that Google managed to save up to $3 billion in taxes by diverting income through Ireland, Holland and Bermuda. Known as the "Double Irish," it's a strategy employed by many international companies (Oracle, IBM, Microsoft, etc) that shelter revenue overseas where taxes skim off as little as 2 percent (or zero percent!) of income rather than 35 percent stateside. As a result, these companies' "effective" corporate tax rate can be cut in half, or better.

The upshot is that our largest international companies are already paying a tax rate far lower than 35 percent. Why would they give up tax code goodies they've fought for over the last few decades in exchange for reform that hurt their profits?

"[The White House] is willing to look at a lower rate but only if it's paid for by cutting the corporate tax exemptions," one Treasury official told me. After all, he said, the administration can't afford to lose revenue on corporate income taxes, which account for about 7 percent of federal receipts.

"The tricky thing is that the people who benefit from these exemption will fight for them," the official continued. "It's the US-based folks, often the smaller companies, who get hit by a higher rate. Folks who are big and international actually like the complexity because they can move stuff around." Just look at Google.

Corporate tax reform would have the potential of pitting large corporate firms who benefit from the current system against smaller companies. It would pit big money against pooled money. For an elected looking to embrace the populist mantle, that might be a fight worth fighting. For a politician with an eye to 2012 or 2014, prematurely calling for higher effective tax rates on America's most successful companies in the wake of a recession might not be a fight worth fighting.

It's one thing to say that our corporate income tax system is dumb. Indeed, its high overall rate chases capital away from the US, while its array of deductions chase revenue away from the Treasury. But it's another thing to chart the path toward bipartisanship victory and tax reform.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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