CQ TODAY ONLINE NEWS
Oct. 13, 2011 – 11:06 p.m.
Corporate Taxes May Be Key to Deal
By Sam Goldfarb and Paul M. Krawzak, CQ Staff
Republicans on the joint deficit committee are trying to scale down ambitions for a top-to-bottom rewrite of the tax code and focus almost exclusively on the corporate tax system in the hopes of reaching a compromise with Democrats, senior Republican lawmakers and aides say.
Since the beginning of the year, the GOP has touted the economic benefits of “comprehensive tax reform.” Such legislation, following the model of a landmark 1986 tax overhaul (PL 99-514), would entail restructuring an array of tax breaks to pay for lower tax rates for individuals and businesses.
But given the political and technical challenges of a full-scale rewrite, Republicans are narrowing their goals, at least for now. Tackling the individual side of the code is widely considered a more difficult task, and their new strategy could be more appealing to Democrats, who are generally more interested in eliminating corporate tax breaks than those that benefit individuals.
President Obama has repeatedly expressed interest in a corporate tax overhaul and directed Treasury officials to investigate the subject.
“There is seemingly some common purpose in doing business-entity tax reform,” Rep.
Hensarling’s comments, made after a closed-door committee meeting, closely matched recent statements by House Budget Chairman
“I don’t think the president seems to be willing to work with us on individual tax reform,” Ryan said Oct. 9 on NBC’s “Meet the Press.” But Ryan added that the deficit panel has the “wherewithal” to do “business tax reform,” which Obama has endorsed.
Covering the Cost
Advocates of a corporate overhaul argue that a lower corporate tax rate would help spur economic growth by improving the competitive position of the United States, which now has the second-highest corporate tax rate in the world, much to the chagrin of lawmakers in both parties. Moreover, with the unemployment rate hovering above 9 percent, lawmakers are eager to have the deficit panel take steps to boost the sluggish economy, even as the panel tries to write a $1.2 trillion deficit-reduction package by its Nov. 23 deadline.
Still, it would be difficult to pay for a significant rate reduction solely by eliminating tax breaks for companies. And raising more revenue than the government collects under the current tax system, as Democrats have demanded, also presents challenges.
Economists note that eliminating certain corporate tax breaks — such as the research and development tax credit and domestic manufacturing deduction — to pay for a lower overall rate could end up harming some industries that benefit significantly from the tax incentives.
In addition, there is a lingering problem, well-known to lawmakers, that many “pass-through” companies do not pay the corporate tax at all. Instead, they have their profits distributed to individual owners or partners, who are then taxed as individuals. Lowering the 35 percent corporate tax rate and eliminating industry-specific tax breaks without also lowering the 35 percent top individual tax rate could hurt those companies.
Concerns about putting one company at a disadvantage compared with another are precisely what give some lawmakers pause about settling for anything less than a rewrite of the entire tax system. Given those concerns, and Democratic hopes for more revenue from wealthier Americans, it will be hard for some lawmakers to abandon hopes of a complete overhaul.
Corporate Taxes May Be Key to Deal
Nevertheless, members of the deficit panel are trying to find a creative solution that would be fair to all types of businesses without major changes to the individual portion of the tax code, according to a congressional aide familiar the panel’s discussions.
Such efforts, which have yet to yield definitive, or public, solutions, are reflected in the comments from Hensarling and Ryan, who notably avoided terms like “corporations” and “corporate tax reform” in favor of “business-entities” and “business tax reform.”
Democrats Proceed with Caution
At least one or two Democrats are interested in trying to write some version of a tax overhaul within the deficit committee or at least come up with specific instructions to congressional tax-writing panels so that they can finish a bill soon.
“So many people want tax reform; I hear it constantly,”
For a long time, Baucus, the highest-ranking Democratic tax-writer, has urged caution when conversations have turned to a possible tax overhaul, stressing that it could take years for lawmakers to properly review the tax system and make the appropriate changes. Yet Baucus seems to have had a change of heart in recent days, arguing that “the time is now to do all we can.”
Baucus, D-Mont., said a corporate-only approach would be “easier” but added that “tax reform, both corporate and individual, is critical.”
Sen.
The aide said Baucus and Finance member
Rewriting the corporate side of the tax system could have a special appeal for some Democrats. It almost certainly would entail eliminating tax breaks they have strongly criticized, including those that benefit large oil companies and corporate-jet owners. At the same time, it would not alter popular tax breaks for individuals and families, such as the deduction for home mortgage interest payments and various savings incentives.
And it would be silent on the issue of the expiring George W. Bush-era tax cuts — meaning that, absent congressional action, tax rates for individuals would rise in 2013 when the Bush cuts expire, producing a windfall of revenue.
The biggest stumbling block for Democrats remains unchanged: Since the deficit panel was established, they have insisted that any agreement needs to include a significant amount of new revenue. To date, Republicans have been open only to new revenue that could come from economic growth, following an overhaul of the tax code, and that could be measured in a “dynamic analysis” by the Joint Committee on Taxation (JCT).
Democrats have looked at revenue from economic growth as an intriguing concept, and as something potentially helpful to getting a deal. But they still insist that increased revenue must be measured by JCT using conventional “static” scoring methods, as is the normal practice.
Corporate Taxes May Be Key to Deal
They also continue to argue that the committee could meet its goal by eliminating some corporate tax breaks and leaving a major overhaul for later.