Corporate Tax Reform Readies for a Comeback

  • September 23, 2016

Is U.S. corporate tax reform on the horizon?

Although the issue demonstrated a vexing ability to appear and – just as quickly – disappear from the legislative radar screen in recent years, there are several signs that genuine tax reform could soon have more traction, and longer staying power.

First, a recent Wall Street Journal article cites the Organization for Economic Cooperation and Development (OECD) as noting that many governments stopped raising taxes as a means to address budget deficits in 2015. Since then, many of these governments have instead instituted targeted tax cuts to stimulate economic growth. This marks “another sign,” writes The Journal’s Paul Hannon “that governments in developed economies are moving away from the budget policies that characterized the years following the 2008 financial crisis, and were known by their many critics as ‘austerity’ measures.”

Second, another Journal article reports that G20 leaders vowed to “use all policy tools—monetary, fiscal and structural—individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth” at a meeting in China earlier this month.

The OECD indicated that changes to tax systems were made specifically to support growth last year and considers cuts in income and corporate taxes to be positive for growth. “Many of the reforms legislated or announced in 2015 and coming into effect in 2016 point to a trend of declining tax burdens on labor income,” it said.

Third, a lower corporate tax rate might not lower federal revenue as much as some tax reform opponents have argued. In a 2015 article, independent think tank The Tax showed that a cut in the corporate tax rate could have significant effects on gross domestic product (GDP), but minimal effects on total federal revenue over the long run. The large boost to the size of the economy from a corporate tax cut comes from a lower cost of capital. “The corporate tax rate is, in effect, a tax on corporate investment; a high corporate tax rate discourages investment, whereas a low corporate tax rate encourages investment,” notes Andrew Lundeen, Director of Federal Projects at the Tax Foundation.

Fourth, the recent outcry over the European Union’s state aid decisions is focusing much more attention on problems with U.S. corporate tax rates. “The U.S. corporate income tax is broken,” asserts a recent opinion column in U.S. News and World Reports. “Our tax rate is the highest in the developed world, yet we collect less corporate tax revenue as a share of gross domestic product than many of our trading partners. The tax both discourages firms from investing in the United States and enables multinationals to avoid tax by reporting profits in low-tax countries.”

As this election cycle nears its climax, it seems more likely that corporate tax reform will feature prominently on the radar screen of our new President and his or her Congressional counterparts.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.

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