Don't Hold Your Breath For Corporate Tax Reform

Later this morning the White House is releasing new details on the budget, which will include new details on its plan to reform the manner in which foreign corporate income is taxed. I got the sense last week that the proposed changes were party of a larger scheme to overhaul the corporate tax. Deputy National Economics Council Director Jason Furman wrote that the "administration's plan is intended as a major, first step" in addressing problems with the tax, and Obama himself said these changes were a "down payment on the larger tax reform we need" to make our tax system fairer and more efficient.

But administration officials argued this weekend that while such plans were still possible they were not in the works.

In particular, administration officials argued that while the president has "always been open to the idea" of bringing down the statutory rate in a revenue-neutral way, no such reforms were planned at the moment.

I think the spirit of the piecemeal reforms is still the right one, since the current system for taxing corporate profits is truly crummy. The US corporate tax has a high statutory rate (the rate in the law, 35%) and a low effective rate (the rate companies end up paying, about 13%). That difference suggests a system that distorts incentives and rewards aggressive tax planning. And that's bad.

But the statutory rate in the US is still well above the OECD average, and if we are going to close various loopholes and push recalcitrant companies toward the statutory limit, corporate complaints about the tax will start to sound more reasonable.

Which is why I also think -- along with Matt Yglesias and Ezra Klein -- that the administration's current proposals would look more attractive if they were bundled snugly with a comprehensive overhaul of the corporate tax. Now I'm less sure that's on the way.

This article available online at:

http://www.theatlantic.com/politics/archive/2009/05/dont-hold-your-breath-for-corporate-tax-reform/17379/