Options for Reforming the Corporate Income Tax System

Published by Michael Novogradac on Tuesday, September 18, 2012 - 12:00am

The Congressional Research Service recently released a report entitled “The Corporate Income Tax System: Overview and Options for Reform.”

Many of the observations and comments in the report are similar to what I have blogged about in the past.  Of particular note, from the report, is the following:

  • For 2011, the low-income housing tax credit (LIHTC) is the 9th largest corporate tax expenditure,  makes up 3.2% of all corporate tax expenditures, and makes up only 0.43% of all tax expenditures (individual and corporate combined).
  • If all corporate tax expenditures are repealed, the top corporate tax rate could be reduced to 29.4%, on a long-run revenue neutral basis.
  • The top corporate tax rate could also be reduced if other tax changes were made.
    • The deductibility of interest, which is not a tax expenditure, could be restricted or eliminated.
    • Additional revenues could be raised through the individual income tax system to pay for a corporate rate reduction.
      • Examples of such options include, higher capital gains tax rates, accrual taxation of gains on corporate stock, and limits or modest taxes on retirement savings (which would benefit from corporate rate reductions), changes to tax preferences available to non-corporate businesses, and other reforms to business taxation.
      • If the corporate tax rate is reduced, and tax reforms to the non-corporate sector are enacted, some business activity may return to the corporate sector, naturally broadening the base.
      • Other business tax reforms may include changes to the taxation of American multinationals operating overseas. If these reforms reduced profit shifting to low-tax countries, the domestic corporate tax base may expand.

The following statement from the report is a bit curious as it applies to the LIHTC:

“Most of the largest corporate tax expenditures have an effect on marginal investment decisions. For example, expensing of research and experimental expenditures, accelerated depreciation, and the low income housing tax credit, all increase the after-tax returns to investment.

I understand how the R&D and accelerated depreciation increase after-tax returns, because they relate to activities businesses already engage in—activities that often, before the tax benefit, generate pretax returns.  The LIHTC, however, creates after-tax returns in an area that doesn’t have any pretax positive returns.