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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, May 23, 2011

Sullivan: Why Obama's Corporate Tax Reform Will Fail

Tax Analysts Martin A. Sullivan (Tax Analysts) has published Why Obama's Corporate Tax Reform Will Fail, 131 Tax Notes 775 (May 23, 2011):

The key to Obama's strategy on corporate tax reform is his insistence that reform not spread to other parts of the tax code and that it be revenue neutral. Although many can disagree, the president could hardly be subject to severe criticism for wanting to keep revenues unchanged. Competitive pressures rule out a tax increase. Budget pressures rule out a tax cut. The president is just taking a reasonable middle course.

But once the president endorses a real plan, his would-be supporters will melt away. The plan with the details filled in will not comport with their fuzzy visions of what corporate tax reform must be. Liberals who want to cut corporate tax expenditures instead of social programs will walk away. And the business community, which really means "corporate tax cut" when it says "corporate rate cut," will give the president the same cold shoulder it gave former Ways and Means Chair Charles B. Rangel, D-N.Y., in 2007 when he floated his revenue-neutral plan to cut the rate to 30.5%.

According to a 2007 Treasury study, the corporate tax rate could be cut to 28 percent if all corporate tax expenditures, except those relating to foreign-source income, were cut. That list of tax expenditures includes some -- like the research credit and the deduction for charitable contributions -- that have no chance of being eliminated. And others -- like accelerated depreciation for equipment -- are considered such a positive inducement to capital formation and competitiveness that it would leave many legitimately questioning if there are actually any economic benefits to revenue-neutral reform. The bottom line: With Obama's revenue constraints, it is nearly impossible to formulate a politically acceptable reform that gets the rate to 30%.

That makes tax reform unattractive to conservative legislators who do not want to go through holy hell only to end up with a modest rate reduction. They would give Obama a political victory on their favorite issue. And they would lose the wonderful talking point about the United States having the highest corporate rate in the world.

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