Why Not Completely Eliminate The Corporate Income Tax

Originally published at Capital Gains and Games.

Corporate tax reform as it’s most often discussed these days sounds great in theory: Lower the overall tax rate and offset the budget impact by eliminating various special provisions.

Who isn’t in favor of that?

As Greg Ip in the latest issue of The Economist notes, the answer is lots of people.

Not surprisingly but largely overlooked in the reports on the plan announced by the White House several weeks ago, the biggest opponents (other than House and Senate Republicans, that is) to any substantial corporate tax overhaul come from the corporate world itself: They are the companies, industries, and sectors that currently benefit from the current system at the expense of the corporations, businesses, industries, and sectors that don’t get the same special treatment.

And that’s just the beginning.

The best way to understand why, regardless of who is president and which party controls Congress, the politics of corporate tax reform will make it much harder to enact any proposal than would seem likely at first glance is to consider the most extreme proposal possible: Rather than just tinker with the corporate tax code by “reforming” it, why not just do away with the whole thing.

Seems easy to love, right? There would be no annual tax return preparation costs; no corporate tax department and, therefore, lower administrative costs; and, of course, no tax payments.

In other words, the world would be a much better place for those who pay corporate income taxes. The only problem: This would be a disaster for many large and extremely influential parts of the corporate tax world.

First, those companies and industries that already pay little or no federal taxes would see no benefit at all if the corporate income tax were to go away. After all, the system that’s currently in place means that they pay nothing now and have an advantage compared to their competitors who do.

In fact, the current corporate tax system is a boon for some companies because they have a negative tax rate and get payments from the government through it.

Second, think of all the accountants and tax lawyers who have devoted much of their lives to helping their employers and clients comply with the tax laws, regulations and rules. What they do for a living would suddenly become unnecessary in much the same way that saddle makers found the demand for their product greatly decreased after automobiles replaced horses as the primary mode of transportation.

Add to that all of the other workers in the tax departments who work along side the CPAs and lawyers and would wake up one morning to find their education, skills, and expertise to be superfluous.

Third, add those who lobby Congress on corporate taxes. I haven’t been able to find statistics on this, but my guess from being in Washington for more than three decades is that substantially more than half of all lobbying is related in some way to changing corporate tax provisions. By definition, these are influential people who know how to have an impact on public policy issues.

Fourth, consider that a significant portion of a major federal agency — the Internal Revenue Service — is devoted to the corporate tax code.

Fifth, a smaller and no doubt less influential group would be those who teach corporate taxes to undergraduate and graduate students who would find little to no interest in their courses. They would quickly would have to go from teaching law, public administration, and economics to history if, that is, there were any positions available.

Sixth, members of Congress and congressional candidates and political party committees would no longer get campaign contributions from corporate political action committees seeking changes in the corporate income tax code because there would be no corporate income tax to change. (My guess is that this could be the biggest campaign finance reform plan ever considered.)

There are more. For example, consider the companies that provide written materials on corporate taxes to attorneys and CPAs.

All of this points out that what might appear to be an absolute political slam dunk — not just reforming but actually eliminating a tax — isn’t at all guaranteed to happen. And that’s the situation for doing away with it completely. Something like the Obama plan, which would offset a reduction in the top rate by eliminating some special tax breaks, would be even more controversial.

Bottom line: If it happens at all, tax reform is going to be far more controversial and take a great deal longer to enact than anyone is currently assuming. Think multiple years rather than months. Also think that enactment is anything but certain.

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