Finding The Right Balance in Corporate Tax Reform

Given the difficult terrain for jobs, businesses have been able to leverage our vulnerability for their benefit.  Through use of tax credits and other loopholes, they have been able to limit their tax liabilities and enjoy advantages in infrastructure, resources, and services that enable their company to grow.  The U.S. is commonly referred to as not being business-friendly with many citing a very high corporate tax rate that ranks among the highest in the world.  However, that distinction might be misleading, as reported by David Leonhardt's "The Paradox of Corporate Taxes" in the New York Times Economix blog.  In order to ensure that revenue sources are enhanced to improve the fiscal conditions for all forms of government, it is essential that our corporate tax code be revised. 

Many economists believe that tax reform is necessary.  Certainly, we do not advocate tax levels being so high that they are overly burdensome and lead to job destruction, rather than job creation.  However, it is fair to suggest that business might not be paying their fair share in infrastructure needs.  New highways, more accessible roads, sewer, and electrical connections are all essential drivers to economic growth.  Their construction will lead to more business activity and facilitate higher market shares and profitability.  By reforming the tax code and limiting the amount of loopholes, we can generated needed revenues, while also lowering tax rates.

Even though this appears to be a sensible solution, there is significant backlash against this type of reform.  Of course, the business community favors a lower tax rate, but they are not willing to sacrifice closing any loopholes.  Given the tenuous recovery, they have been able to effectively frame the debate in terms of facing an onerous tax code that prevents them from expanding operations, rather than looking at the strain this method puts on our federal, state, and local economies.  If infrastructure needs are to be met, then they are increasingly being financed through debt financing at the federal level and higher property and sales taxes at the state and local level.

While there is significant debate within economists regarding whether our tax code should be geared more toward equality or efficiency, most will agree that loopholes and excessive tax credits are bad policy.  By limiting the use of loopholes, one can expand the base of businesses to pay for taxes.  If one favors a corporate tax code that will enhance economic growth and job creation, they will want the tax rate to be low.  Sufficient revenues can be collected through low tax rates, but that can only happen through closing loopholes.  Then there is another segment that argues that businesses are receiving a benefit through enhancements to roads, facilities, and other resources, so they should pay for these services.  This can be done by a combination of closing loopholes and maintaining similar tax rates.  If this occurs, then more equality will be achieved and the end result could be lower debt spending and more tax relief for consumers and property owners.