Kevin Glass

The U.S. corporate income tax code is so rife with loopholes, inefficiencies, breaks and waste that it's hard to come up with any general reform beyond scrapping the whole thing. On tax day, when all Americans owe their individual returns to the Internal Revenue Service, it'd do us good to remember that the way that the federal government treats corporate taxes is even worse than the income tax.

President Obama has been pushing corporate tax reform since earlier this year, when he highlighted it as a priority in his State of the Union address. His plan would, roughly, lower the statutory corporate tax rate from 35% to 28% while closing loopholes and deductions in order to stay "revenue neutral" - that is, preserve the total amount of tax revenue that the federal government takes in from businesses.

The Government Accountability Office released a wide-ranging report last month on how wasteful and duplicative the corporate income tax system is. Overall, the GAO finds, the "tax expenditures" of the corporate tax code amount to over $181 billion per year. These include many tax breaks that are afforded to individuals who file as small businesses as well, however; the GAO found that there are 24 tax breaks enjoyed solely by corporations to the tune of $58.9 billion. Ordinarily, conservatives can cheer a tax code that allows both individuals and corporations keep more of their money, but many of these tax breaks are specifically targeted for "green energy" programs. Among the largest are tax credits for energy efficient appliances, tax credits for investment in "clean coal," and tax credits for "bio-diesel and small agri-biodesel producers."

What's more, the GAO found, one-third of all these corporate tax credits serve the same function as ordinary government spending programs. Spending programs that are run by the Departments of Energy, Interior, Transportation, Commerce, HHS and others are duplicated by tax credits in the corporate tax code. For example, the aforementioned bio-diesel and agri-biodesel tax credits serve a similar purpose to the Department of Agriculture's Biorefinery Assistance guaranteed loan program, while the clean coal tax credit is duplicated by the Department of Energy's Clean Coal Power Initiative.

The GAO's report is a damning indictment of the way that America treats its corporate tax code. Even President Obama has proposed corporate tax reform that would eliminate some of these tax breaks and lower the overall tax rates for corporations in a revenue-neutral way. America's statutory corporate tax rate is the highest in the developed world at 35%.

Still, some progressives see corporate tax reform as a way to actually extract more tax revenue out of the most inefficient kind of tax. Pat Garofalo, deputy opinion editor for U.S. News, attacks the revenue-neutral reforms that President Obama has proposed:

Given the reality that, after the economy recovers, the U.S. will have to begin to reduce its deficit, adopting a revenue neutral corporate tax reform package would constitute a colossal missed opportunity. There's nothing wrong with clearing out loopholes and deductions, and even lowering the marginal corporate rate a bit; the mistake would be in foregoing all of the revenue chasing ever-lower corporate tax rates, rather than taking advantage of the funds to balance the books.

In the end, it's unlikely that corporate tax reform actually occurs anytime soon. But putting the idea of revenue neutral reform in his budget is one more way in which Obama is ceding ground to the Republicans on economic issues in an attempt to meet some amorphous definition of "reasonable," rather than making the case for what is best economically.

There are many downsides to President Obama's proposal - for example, it's unlikely he could find enough loopholes to lower the rate from 35% to 28% while staying revenue-neutral - but its goal of revenue-neutrality is, if anything, too much of a concession to his progressive base. The corporate tax is such an inefficient mess that it's not worth it to even try to preserve the revenue it generates. Cutting corporate taxes is an idea with transpartisan and economic support.

The Organization for Economice Cooperation and Development's 2010 study on tax incidence and economic growth suggests that the corporate income tax is definitively the worst kind of tax that any nation can use to raise revenue.

Corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements. In addition, most corporate tax systems have a large number of provisions that create tax advantages for specific activities, typically drawing resources away from the sectors in which they can make the greatest contribution to growth.

To be fair to progressives, left-wing opinion is relatively split on the issue. While Pat Garofalo believes that "revenue-neutrality" is too kind to tax-cutters, people like Mother Jones' Kevin Drum and Slate's Matt Yglesias have both written recently of scrapping the entire corporate income tax enterprise.

The free-market R Street Institute wrote a policy brief last week that "Cutting the Corporate Tax Rate Means Cutting Corporate Taxes" in which they lay out that sticking to "revenue neutrality" could be economically harmful - the corporate tax code shoud focus on growth, not revenue:

It is time we got our economic house in order and created a tax system that looks like it was designed on purpose. Reducing the corporate tax rate so as to make it competitive with the other developed nations would do much more for economic growth, employment, and wages than any amount of “stimulus” spending from the government. Making economic growth the focus for tax reform may be a novel concept for this country but we can no longer subordinate growth to more plebian political objectives and get away with it.

The corporate tax code has been - and will continue to be - harmful for our economy. It's inefficient, it hinders innovation and business formation, and it hampers growth. Reform is of the utmost priority, and while revenue-neutral corporate tax reform would be a step in the right direction, net revenue-negative reform would be even better.


Kevin Glass

Kevin Glass is the Managing Editor of Townhall.com. Follow him on Twitter at @kevinwglass.