The voices of Tax Policy Center's researchers and staff
Yesterday my colleague Bob Williams blogged on how difficult it will be to dig ourselves out of our enormous budget hole. He examined CBO’s biennial Budget Options report, which contains a list of “revenue options” for modifying Federal taxes. Bob focused on the year with the smallest deficit over the ten year budget window which happens to be 2012. In that year, CBO predicts we will run a deficit of “only” $633 billion. The individual income tax raises the bulk of federal revenues, so naturally Bob looked at incremental reforms of those levies.
But, what about the corporate income tax? Could we raise enough from businesses to make a major dent in the deficit? The short answer is no. Before looking at ways to broaden the tax base, it is worth noting that, in 2012, the entire corporate income tax is expected to bring in only $339 billion – roughly 11% of total revenues and barely half the projected deficit.
So could we at least take some meaningful steps toward balancing the budget by raising corporate taxes? Once again, the answer appears to be no.
How about boosting the statutory rate, now 35 percent for most corporations? CBO doesn’t quite tell us how much that would generate, but it provides an important clue. The budget office estimates that lowering the rate by five percentage points would reduce tax revenues by about $45 billion in 2012. Raising the rate to 40 percent would probably generate significantly less revenue than lowering it to 30 percent would lose, but let’s say it would get Treasury the same $45 billion. That would narrow the deficit by roughly 7 percent.
How about repealing the domestic production activities deduction (also known as the Section 199 deduction)? Enacted to 2004 to cut effective rates for U.S. manufacturing, the deduction is equal to 9 percent of corporate income. Dumping it would raise only $12 billion in 2012.
Raising corporate rates would increase the tax burden on corporations substantially without meaningfully reducing our deficit. And since the U.S. already has the highest statutory rate among developed countries (except for Japan), we really should be thinking about lowering the rate, not raising it. And remember, corporations are really all of us since, in the end, only individuals pay taxes
What if we simply broadened the corporate tax base instead of tinkering with rates? These options are also a drop in the proverbial revenue bucket. Cutting back on the deductions that firms get for depreciation by requiring longer lives for plant and equipment might raise $18 billion in 2012. Ending a provision that subsidizes exports (called the source-rules exception for exports) might produce $4.5 billion.
Finally, President Obama has targeted multinational corporations for big tax changes. In his 2010 Budget, President Obama proposed to cut back on deferral – the current policy of only taxing foreign earnings of US corporations when those profits are repatriated to the US. What if we simply eliminate deferral and tax all income as soon as it is earned, regardless of where it is produced? That would be a radical reform, but would raise a measly $6.0 billion in 2012.
Dramatic changes to the corporate income tax system – including big increases in the tax on firms – would do very little to close the budget gap. That doesn’t mean we shouldn’t be looking seriously at corporate tax reform. But as far as making a dent in the deficit, Bob summed it up in yesterday’s post: back to the drawing board…
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