This column contains a correction.
It seems that corporate tax reform is perpetually in the news, but the debate never seems to move beyond rhetoric. This was reinforced when new Speaker of the House Paul Ryan (R-WI), acknowledged this week that congressional Republicans would take up corporate tax reform next year for purposes of positioning Republicans for the 2016 election.
The Center for American Progress has for years tried to move the debate over tax reform, including corporate tax reform, beyond political hyperbole and common myths. In October, CAP published an issue brief debunking seven of those myths, including the claim that taxes are crushing America’s corporations. In 2013, CAP presented its thoughts on what progressive, pro-growth corporate tax reform could look like. In 2014, CAP tried to show how much consensus actually exists beneath the rhetoric and this year, waded into the discussion about patent, or innovation, boxes.
That’s why it was refreshing to hear Sen. Elizabeth Warren (D-MA) so clearly communicate in her speech at the National Press Club this week some important points that policymakers must agree upon if there is to be progress on corporate tax reform.
First, the corporate income tax must raise more revenue than it does now. The Joint Committee on Taxation publishes a table—Table A-3 here—in its annual “Overview of the Federal Tax System” that shows the revenue raised by the corporate income tax as a percentage of total federal revenues since 1950. Aside from a few fluctuations, corporate tax receipts have declined fairly steadily over the past several decades as a percentage of total federal revenues, from a high of 32.1 percent in 1952 to 10.6 percent in 2014.* As Sen. Warren made clear, in the early 1950s, corporations contributed about $3 out of every $10 in federal revenue, but today, they only contribute about $1 out of every $10.
Second, a point that is frequently lost in the corporate tax reform debate is that corporate tax receipts are an important means of funding the very public investments that U.S. businesses rely upon—such as investments in an educated workforce and a robust legal system. Those public investments are essential to a smoothly functioning marketplace. They are part of the reason why, as Sen. Warren stated, the United States has “the deepest and most liquid capital markets” in the world. Without a corporate tax, a significant number of those profiting from business would pay little to nothing toward the cost of the government’s contribution to the success of their businesses.
Third, almost no company pays the statutory corporate income tax rate of 35 percent, as many studies have demonstrated. Yet the debate gets stuck on the statutory rate, despite the fact that there are many ways to bring the statutory rate down while still increasing corporate tax receipts overall. For example, lawmakers can reduce or eliminate the tax breaks that currently allow very large multinational corporations and certain tax-favored industries to pay effective tax rates that are far lower than the average rate. Without those tax breaks draining revenue out of the system, the corporate income tax would raise more revenue, some of which could be used to lower the rate. Another possibility to consider is whether to require large businesses currently not required to pay a separate corporate entity level of tax, such as limited partnerships and S corporations, to pay corporate income tax if they exceed a specified size. These organizational forms were never intended to be mechanisms for large businesses to avoid taxes, but large companies have increasingly switched to these corporate organizational structures over the past few decades due to changes in the tax code that lowered the individual tax rates relative to the corporate rate.
Finally, policymakers must come together on the goal of leveling the playing field to reduce the harmful economic distortions that occur when certain industries are favored or when companies make decisions based on tax avoidance rather than on activities and investments that will spur innovation and long-term competitiveness. Tax breaks for one industry or another, as well as outright loopholes that were never intended to be tax breaks in the first place, all create more distortions in business behavior and unfairness between businesses, not to mention complexity for tax administrators. Many of these tax breaks have no rational basis, such as the billions of dollars spent through the tax code each year for the oil and gas industry. Tax administrators must devote huge amounts of staff time developing regulations to clarify how each tax break will be applied in practice, and businesses spend top dollar on tax advisors to help them find every opportunity to lower their tax bills through these tax breaks—which in turn requires tax administrators to spend even more time creating anti-abuse regulations.
Committing to a level playing field also means shoring up the tax code as it applies to multinational corporations, which use a variety of cutely named techniques to reduce their effective tax rates well below those of most domestic businesses, especially small ones. Sen. Warren wisely avoided technical descriptions of these intentionally complex maneuvers and instead highlighted some glaring evidence of their existence—for instance, the large number of tax haven subsidiaries of U.S. companies. CAP has further recommended addressing a related problem: the tax code’s preferential treatment of debt over equity, which underlies earnings stripping techniques used by multinationals and encourages excessive levels of debt in U.S. companies.
At some point, the corporate tax reform debate may focus on how the tax code actually could support business investments in human capital, as well as in innovation that leads to a sustainable business environment and economy in the long run. But getting to the point of achieving these types of reforms will never be reached if the conversation remains fixated on the misleading claims that have dominated the debate over corporate tax reform.
Alexandra Thornton is the Senior Director of Tax Policy on the Economic Policy team at the Center for American Progress.
* Correction, December 7, 2015: This column has been updated to reflect that federal corporate income tax receipts have declined over the past several decades as a percentage of total federal revenues.
The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.
Senior Director, Tax Policy