If only cleaning up the loophole-choked corporate tax code were as easy as presenting a sensible framework for reform. President Barack Obama's proposal to lower the corporate tax rate from 35 percent to 28 percent while closing exemptions and ending subsidies is a reasonable approach to tax reform. But in this election year it is unlikely that anything the president proposes will get serious consideration by the Republican-led House, and the Republican candidates for president are determined to make deeper tax cuts a campaign issue.
The business community has long grumbled that the United States has one of the highest rates of corporate taxes in the world. But due to the tax code's complexity, and the alacrity with which corporations navigate its loopholes, not many businesses pay the full freight. The average tax rate actually paid by domestic corporations is 26 percent as of 2008. And many large companies earn millions in annual profits without paying any corporate tax at all. The thrust of Obama's tax reform would level the playing field and make it less likely that companies with the smartest lawyers and best accountants pay the lowest tax bill.
Some of the loopholes and subsidies Obama intends to close are familiar and should have been eliminated long ago. For instance, he would end subsidies for corporate jets and oil and gas companies, and he would eliminate the special tax status for "carried interest" that protects partners in private equity firms from paying more than a 15 percent tax rate on their income.
Obama also calls for closing the loophole that allows large businesses to organize as a partnership to avoid paying any corporate income taxes. Partnerships were designed for small businesses, but huge firms have taken advantage of them for tax purposes, including the mutual fund giant Fidelity. Another welcome adjustment would charge U.S. companies with foreign earnings a minimum corporate tax. Right now companies with overseas profits play games to avoid taxes that deny America domestic investment.
Most significantly, Obama's plan is revenue neutral. It would bring in the same revenues by lowering the corporate tax rate but requiring more businesses to pay their fair share. Compare that to the Republican presidential front-runners who propose cutting corporate taxes even deeper without replacing the revenue. Mitt Romney wants to cut the corporate tax rate to 25 percent and calls for some "broadening" of the tax base but with no specifics. (In an old supply-side trope, Romney claims growth will make up any losses.) Rick Santorum would simply slash the corporate tax rate in half to 17.5 percent. America has a revenue problem, and the leading Republican contenders for president who complain about the federal deficit would reduce revenue even further.
Getting serious tax reform through a divided Congress in an election year is wishful thinking. But Obama would make the tax code significantly fairer. The president will have to draw that distinction as the campaign unfolds and explain to voters that the real issue is not just which candidate proposes the lowest tax rate.