Tax Reform Targets Corporate Breaks

The broad outlines of tax reform have always been clear. Lawmakers trim or eliminate certain tax expenditures and use some or all of the additional revenue to lower tax rates. As a general concept, most economists can agree that this approach of broadening the tax base and lowering rates will have positive economic benefits, reduce economic distortions from our tax code, and put the country on a more secure fiscal footing. 

But the general consensus around tax reform becomes contentious when the conversation moves from general concepts to specific tax breaks. As Reuters reported yesterday, billions of dollars of tax breaks for energy and manufacturing companies have been placed on the table by the duo leading the charge to reform the tax code: Senate Finance Committee chairman Max Baucus (D-MT) and House Ways and Means Committee chairman Dave Camp (R-MI).

The duo are considering trimming a slew of tax deductions and other breaks to offset the cost of cutting the top corporate and individual rates to as low as 25 percent, say aides and others. The corporate rate now tops out at 35 percent, while the highest individual rate is about 40 percent.

Baucus and Camp found the most common ground in potential corporate tax code revisions while working together on the congressional "supercommittee," a group of lawmakers who tried but failed to forge a debt deal in 2011.

"There were a lot of areas of agreement when they delved into the code," said a senior legislative aide involved in the supercommittee effort.

The article describes three of the largest corporate tax breaks -- accelerated depreciation, the domestic production deduction, and LIFO accounting -- as candidates to eliminate in the name of raising revenue and reducing the corporate rate. According to our Corporate Tax Rate Calculator, eliminating those three provisions alone would provide enough revenue to drop the corporate rate below 28 percent. Eliminating the first, accelerated depreciation, provides three-quarters of the rate reducution. The article quotes CFRB senior policy director Marc Goldwein saying, "It is pretty much impossible to design a corporate tax reform proposal which reduces the rate to the mid-20s without touching depreciation." 

Most can agree in principle to tax reform which cuts special provisions and lowers the rate, especially on the corporate side. But when Congress returns in September, they will face increasing pressure to keep specific provisions as they tackle comprehensive tax reform of both the individual and corporate tax code. However, every provision they take off the table will make it that much harder to lower rates or raise revenue for deficit reduction. That's why we've applauded the clean slate approach adopted by the Senate Finance Committee, which starts by assuming all tax breaks are removed from the code. The burden of proof is shifted to the advocates of tax breaks, who must justify why a particular tax break is worth raising marginal rates to support one specific provision.

We've been profiling these tax breaks in our new blog series, The Tax Break-Down. We've previously profiled Last-In, First-Out (LIFO) accounting rules, one of the major corporate tax breaks mentioned in the article. We'll be discussing many more corporate and individual tax provisions throughout the fall.