Why You Can't Reform The Corporate Income Tax

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JONATHAN CHAIT FEBRUARY 2, 2011

Why You Can't Reform The Corporate Income Tax

The corporate income tax has high statutory rates but, with its vast loopholes and exceptions, low effective rates. In theory, reforming it shouldn't be hard. Every dollar of closed loopholes means another dollar of lower rates, so the winners should equal the losers. In practice, it's extremely tricky. Suppose you redefine companies with low rates as "companies with lots of lobbying clout" and companies with high rates as "companies with little lobbying clout." That may not be a perfect description, but it's a reasonable approximation. So then reforming the corporate income tax means transferring money away from companies with lots of political clout toward those with less political clout.

Anybody see why this might be hard? Right.

David Leonhardt has an excellent column about the barriers to reform, including this key nugget:

Economists have long pleaded for an overhaul of the corporate tax code, and both President Obama and Republicans now say they favor one, too. But it won’t be easy. Companies that use loopholes to avoid taxes don’t mind the current system, of course, and they have more than a few lobbyists at their disposal.

The official position of the Business Roundtable, one of the most important corporate lobbying groups, is telling. The Roundtable says it supports corporate tax reform. But it actually favors only a reduction in the tax rate. The group refuses to say whether it also favors a reduction of loopholes.

The Business Roundtable is the moderate business lobby. If they won't support corporate tax reform, it has zero chance.

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posted in: jonathan chait, david leonhardt

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