Is corporate tax reform realistic?

International tax experts say that the US lags behind other nations in terms of corporate tax reform. Is there any hope of changing the system?

By , Guest blogger

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    US Senate Finance Committee ranking member Orrin Hatch (R-UT) points to a chart during a hearing on oil and gas tax incentives and rising energy prices on Capitol Hill in Washington May 12, 2011. Should tax incentives for corporations be changed?
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This morning, a panel of veteran international tax experts tried to put the U.S. struggle to fix its corporate tax system in broader perspective. Unfortunately, they concluded that the U.S. is lagging well behind the rest of the world in corporate reform and, worse, the odds of any serious progress anytime soon are slim.

The group spoke to the National Tax Association’s annual conference here in Washington. Jeffrey Owens of the OECD, Jack Mintz of the University of Calgary, Barbara Angus of the accounting firm Ernst & Young, and William Morris of General Electric came to the panel with quite different perspectives. Mintz has advised the Canadian government in its successful efforts to lower rates and eliminate tax preferences. Morris discussed the U.K.’s ongoing—and so far less successful—attempts to do the same. Angus talked about where the U.S. stands, and Owens provided a broad multi-national view.

As we await possible reform plans from both the Obama Administration and the House Ways & Means Committee, this panel put some interesting ideas on the table. Among them:

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  1. Mintz argued that Canada did not lose a lot of revenue by lowering its very high corporate rate, and suggested the U.S. would not either. He said companies can both easily shift profits to other jurisdictions and take advantage of tax preferences when faced with very high rates. As rates are cut, firms are less likely to manipulate income. His view is more than a little controversial. Among others, Jane Gravelle of the Congressional Research Service has found that a significant cut in U.S. rates would lose substantial tax revenue.
  2. Canada succeeded in cutting rates and broadening its corporate tax base thanks to a strong political consensus that formed behind the issue. Corporate rate cutting had the support of liberal provincial governments as well as a conservative national government. We are far from such a consensus here.
  3. GE’s Morris, whose firm is enormously successful at keeping its tax bill low, said that firms might not object to a proposal that would end their ability to defer paying domestic tax on foreign income until those profits are returned to the U.S. However, he suggested they’d give up that benefit only if the corporate rate were low enough (he did not define “low.”).
  4. Unlike smaller countries, the U.S. might be able to get away with high tax rates given the many other advantages firms have doing business here. However, it may see a steady erosion in the quality of investment.
  5. Stand-alone corporate reform is unlikely in the U.S., although it has succeeded elsewhere. Angus, the most optimistic of the group, urged broad-based business reform that includes “pass-through” firms whose income is reported on the tax returns of their individual owners. But Owens and Mintz felt it would be far more productive for the U.S. to pursue reforms that go far beyond business taxes.

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