The Wonk Room

Obama Administration Shelves Corporate Tax Reform After ‘A Blitz Of Complaints From Businesses’

Earlier this year, the business lobby went into high gear to prevent the Obama administration’s plans for corporate tax reform, with the Business Roundtable promising to spend “whatever it takes” to ensure that the reforms never saw the light of day. That determination seems to have had some effect, as the Wall Street Journal reported today that administration “has shelved a plan to raise more than $200 billion in new taxes on multinational companies following a blitz of complaints from businesses.”

As the Journal noted, the particular reform in question — which would have limited the ability of corporations to defer taxation on profits that they earn overseas — drew the ire of the corporate world, and “companies ranging from Microsoft Corp. to General Electric Co. to International Business Machines Corp. put the topic at the top of their Washington agendas.”

Meanwhile, the CBO has predicted that this year’s “dramatic fall in corporate profits, combined with tax breaks designed to offset the burden of the economic recession, will drive corporate tax revenues down by more than 50 percent this year, to just $139 billion.” And, as Professor Joann Weiner pointed out, “even if corporations were not chalking up losses, the federal government would still face a shrinking tax base due to changes in the organizational structure of U.S. businesses”:

Since companies can essentially choose their form of taxation, largely through relatively permissive federal and state tax laws, it’s no wonder that the U.S. has one of the largest shares of income earned in non-corporate form…Profitable companies have an incentive to organize in a tax-favored form, while unprofitable companies have an incentive to remain in corporate form where they may one day offset future profits with today’s losses.

Currently, just 12 cents out of every federal dollar comes from corporate tax revenue. David Weidner, meanwhile, noted that “corporate income tax as a share of gross domestic product has fallen from 6% in 1951 to about 2% last year,” and that “the decline is mostly due to a shrinking corporate tax rate.”

Because of the administration’s move, not only does the U.S. lose $200 billion (over ten years) that could have gone towards remedying long-term budget deficits, but the drive to fix our nonsensical corporate tax code has stopped cold before it really got underway. Some administration aides did say that the tax deferral may be revisited “as part of a broader tax overhaul sometime next year,” but I’m worried that the business lobby will only feel emboldened by its ability to prevent reform and come out even stronger next time.