Several of the letters of April 10 criticize my proposal (“Corporate-Tax Reform Without Tears,” op-ed, April 1) to reduce the corporate tax rate from 35% to 25%, financed by allowing corporations to deduct 70% (instead of 100%) of gross interest expense. My proposal would be revenue neutral while reducing the strong tax bias in favor of debt.
Co-authored with Lucas Goodman
From the abstract:
Many lawmakers have indicated support for reducing the statutory corporate tax rate from 35 to 25 percent on a revenue-neutral basis. However, they have not made clear how they would broaden the base enough to pay for that rate reduction. This report proposes a specific approach for revenue neutral corporate tax reform: limiting the tax deductibility of interest expense for C corporations.That would significantly reduce the tax code’s bias in favor of debt-financed investment relative to equity-financed investment, while keeping the overall cost of capital roughly the same.
The authors propose reform that lowers the corporate tax rate from 35 to 25 percent and allows nonfinancial C corporations to deduct only 65 percent of their interest expense, with special treatment for the financial sector and for companies that
would have otherwise realized taxable losses. Based on a static analysis of aggregate data between 2000 and 2009, the authors calculate that the revenue loss from lowering the corporate tax rate to 25 percent would have been about the same as the revenue gain from their proposed limits on interest deductions.
The transportation bill that Congress passed this summer is financed, in part, with a budget gimmick: Lawmakers changed the funding rules for corporate pension plans. These changes help the federal budget in the short term by reducing the tax deductions that corporations take for contributing to these plans — thereby reportedly increasing their taxable income.
As I wrote last week, provisions built into current law threaten to take $500 billion out of the U.S. economy in 2013. While Congress cannot allow this “fiscal cliff” to occur as scheduled, it should use this “crisis” as an opportunity to pass a smarter package of spending cuts and revenue increases that will gradually put us on the road to fiscal discipline.
Click here to watch my appearance yesterday on Bloomberg TV.
If Congress does nothing, various tax and spending provisions will take $500 billion out of the economy in 2013. These provisions, collectively known as the “fiscal cliff,” include the expirations of the Bush Tax Cuts and the payroll tax cut, the spending cuts triggered by the failure of the Supercommittee, as well as other year-end changes.