Wyden-Gregg Tax Reform Proposal Would Lower The Top Corporate Rate To 24% And Keep The Top Individual Rate At 35%.
I applaud the tax reform proposal just put forth by Senators Ron Wyden (D-OR) and Judd Gregg (R-NH). Lowering the top corporate tax rate is very important for improving the competitiveness of our exports, and keeping the top individual rate at 35% while repealing the dysfunctional Alternative Minimum Tax is an achievement in itself.
Tax reform is all about efficiency gains. They're not easy to measure. They don't lend themselves to politically charged sound bites, but they do improve long-run productivity. They level the playing field among businesses and individuals with similar incomes. Special tax breaks grow on the Tax Code like barnacles on the bottom of a boat, with similar effects. The more barnacles, the slower you go; the more tax breaks, the weaker the economy. However, barnacles on a boat are a lot easier to see.
I would hope for hearings at the Senate Finance and Senate Budget Committees this year, but I'd be surprised if Congress got serious about tax reform until at least a year from now. If the Tax Reform Act of 1986 is any example, it will take a strong push from the president to get this going. That effort started with the Bradley-Gephardt proposal of 1978, which I estimated when I was at the Joint Committee on Taxation. It took eight years of debate and political jostling to enact tax reform then. Hopefully, we can proceed more rapidly this time.
This 20th anniversary retrospective of the '86 Act is instructive.
See this 2005 CBO study of corporate tax rates around the world.
Here are corporate tax rates by state and by country from a 2008 Tax Foundation study.
One concern: The Wyden-Gregg proposal would encourage high income individuals to become Sub S and Limited Liability Corporations to enjoy the 24% top corporate rate, 11% points lower than the top individual income tax rate. That's too big a difference. Ideally, we should have identical top rates for corporations and individuals.
Bookmark/Search this post with
sub s
"The Wyden-Gregg proposal would encourage high income individuals to become Sub S and Limited Liability Corporations to enjoy the 24% top corporate rate"
This is unlikely to be right. Both Sub S and LLC treatment normally cause the corporate income to flow through to the owner--in the LLC because it is a disregarded entity for tax purposes, in the Sub S because the point of sub S is that all income flows to the shareholders. So they don't affect your tax rate.
Possibly people might become C corps, although there are a lot of problems with that if you need to spend your income.
I'm far from being an expert,
I'm far from being an expert, but don't the Check-the-box Regs allow eligible entities to elect to be treated as corporations for federal income tax purposes?
revenue?
This seems like it would preserve the big ticket tax expenditures. If that's the case wouldn't this be revenue negative?
Pete, Assuming equal revenue
Pete,
Assuming equal revenue either way, I generally favor reduction/elimination of tax expenditure subsidies (which are essentially spending in everything but name) and lowering of tax rates, but shouldn't we use revenue gains from reduction/elimination of tax expenditure subsidies to reduce our long-term fiscal imbalance rather than offset them with cuts in tax rates?
If one thinks that reducing corporate tax rates is justifiable in itself, that's a case that should be made -- lost revenue net of revenue feedback effects vs. GDP growth and higher after-tax income per dollar of gross, etc.
If not, but if reducing corporate tax rates and offsetting the lost revenue by raising other tax rates is "better" overall than the status quo, then a case should be made for that, and that case should also explain why that combination is better overall than just raising those other tax rates and using the incremental revenue to reduce our long-term fiscal imbalance.
But using reduction/elimination of tax expenditure subsidies to "offset" the lost revenue of a cut in corporate tax rates is equivalent to achieving some reduction in spending that is necessitated (eventually) by the need to reduce our long-term fiscal imbalance, and then blowing it on a tax cut (again, unless the tax cut can be justified on its own).
The above is not to say that revenue-neutral changes in our tax code can't be beneficial (they can), just that if we use up the least painful and politically easiest sacrifices to "offset" new spending or tax cuts, we end up having to make even more painful and politically difficult sacrifices to mitigate the long-term fiscal imbalance, and we should consider this lost opportunity when assessing the desirability of the change in tax policy. And the same applies for shifts in spending, such as Obama's/Democrats' healthcare "reform", which uses up (supposed) reductions in projected spending to fund a new entitlement rather than use such reductions (if they actually occur) to reduce our long-term fiscal imbalance.
Same corporate & top income rate?
"Ideally, we should have identical top rates for corporations and individuals."
This statement taken with your applause at lowering the corporate rate must mean that you think that the top income rate must be lower than 35%, correct? What's your ideal top rate and personal income tax scheme generally?
""They level the playing
""They level the playing field among businesses and individuals with similar incomes""
Is this really a "leveling" of the playing field, since corporate profits are really an abstraction that only have value in so far as they are used for corporate purposes, or go to individual's themselves?
I think it's more important to level the playing field among businesses, and among competing interests. And in this regard, I'll suggest it again, and continue to suggest it:
The way to level the playing field is to VAT industries, processes and usages that pollute and at the same time also add to our already exorbitant anthropogenic atmospheric forcing (which, since it's rarely stated, I'll remind again, is both NON linear in effect, AND has a lag of several decades or more in cause and effect because of the time it takes to heat oceans) -- and use the revenue for deficit reduction, other tax decreases, short term adjustment period hardship amelioration or stimulus, and/or positive market incentive for those industries, processes, and end uses, that don't; that is, those that are right now being phenomenally penalized by what is in fact a hidden, but gargantuan, de facto subsidization of the former group, over the latter.
I'd love to see a post on here either taking issue with this point, or agreeing with it, so we can debate or discuss it.
Re' lowering the corporate tax rate, it seems you say at the end of the piece that top individual and corporate rates should be the same, but at the outset of the piece support lowering the top corporate rate and keeping the top individual rate at 35%, which does not keep them the same.
Does lowering the top corporate rate, by the way (at a time when we are adding excessively to outstanding national debt) really make our industries more competitive?
I agree with tax breaks being barnacles, and such loopholes are probably the bigger problem. I don't think the "playing field leveling" proposals above are tax breaks or punishments; but do support the idea -- which previously Congress has been fairly imprecise about -- that it should not pick and choose, but directly and only effect the inefficiency itself: In this case VAT what is in effect being de-facto subsidized because its costs are not integrated, and only reward direct processes that can only offset this and can not be used for any other purposes.(Don't subsidize R & D at all in this regard, and, for example, don't even subsidize windmill building or geothermal production; subsidize their implementation in place of fossil fuel utilized sources, and end uses that by default implement a massive net reduction, such as vastly different vehicle choices for example, if we feel we must "balance" this with "rewards" to make it more politically palatable.)
-Ivan Carter
Tax incentives are backwards
The Wyden-Gregg proposal would encourage high income individuals to become Sub S and Limited Liability Corporations to enjoy the 24% top corporate rate, 11% points lower than the top individual income tax rate.
The income of Sub S Corps and LLCs is taxed directly to their owners at personal rates -- there is no "corporate" tax rate for them, to enjoy or otherwise.
Perhaps this creates some incentive the other way, for high-income owners of S Corps and LLCs to reorganize their businesses as regular C corps.
If one is just an individual with high income who owns no business there is nothing to do "corporation"-wise, although there likely is to be plenty one could do investing-wise.
tax on capital income -- Pete's identical top rates
Wouldn't we want to combine the corporate rate with the capital gains rate to get a total tax rate on the flow of capital income, and then compare that to the tax on wages? I believe that's the basic comparison that a new business would make when organizing as a regular corporation or pass-through.
Exchange rates will always adjust to compensate for corp. tax
In the long run, or even the medium run or shorter, the exchange rate will adjust to an increase in the corporate tax rate to keep long run imports about equal to long run exports.
There are important efficiency reasons to have substantial corporate taxes. Corporations use government roads, other infrastructure, courts, FTC, etc. Whenever a party doesn't pay for resources they use it can lead to substantially wasteful use of those resources.
In the real world, there are long established in economics pure free market problems like externalities, asymmetric information, inability/impracticality to patent, great economies of scale/natural monopoly, high transactions costs, etc. These make it so that substantial taxation and especially spending by the government on high return social investments, investments of the kind the free market will underprovide due to the above problems, can greatly increase growth and total societal utility.
Tax Cuts and Government Investment
For more on this see this Economist's View post:
http://economistsview.typepad.com/economistsview/2008/08/tax-cuts-and-go...
Why repeal the AMT?
As someone who pays quite a bit extra tax due to the AMT, I do not understand why you want to repeal it. I'd much replace the non-AMT tax code with the AMT. It gets rid of a lot of distorting, special interest tax breaks, and would increase revenue at a time that is definitely needed.