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Pepperdine University School of Law

Tuesday, July 24, 2012

Morse: Corporate Tax Reform in Theory and in Politics

CTRSusan Morse (UC-Hastings), Corporate Tax Reform in Theory and in Politics (reviewing Martin A. Sullivan (Tax Analysts), Corporate Tax Reform: Taxing Profits in the 21st Century (Apress, 2011)):

To find out what is going on with corporate tax reform, read Martin Sullivan. Read his columns, and read his book, Corporate Tax Reform: Taxing Profits in the 21st Century. Read him because he squarely tackles the interaction of theory and politics in the area of tax policy.

Academic theories of legislative process make more sense in context. Daniel Shaviro’s analysis of the 1980’s individual base-broadening, rate-lowering reform package is a case in point.  In the area of corporate tax reform, scholars have worked with the understanding, developed for example by William Eskridge, Philip Frickey and Elizabeth Garrett, that the U.S. legislative process favors the status quo.  Against this backdrop, Jennifer Arlen and Deborah Weiss argue that agency costs further hamper reform because managers favor policies like accelerated depreciation that provide targeted incentives for new corporate investment, even though shareholders prefer policies that also enrich existing investment.  Michael Doran builds on the Arlen and Weiss analysis with a public choice account of heterogeneity of interests among different corporations.  The result, he argues, is an incentive for corporations that disproportionately benefit from a certain tax break, for example the research and development credit, to lobby energetically to keep that tax break rather than supporting more general reform proposals like base-broadening and rate-lowering.

Corporate Tax Reform and Sullivan’s related columns connect academic theories about corporate income tax reform to the political morass facing current corporate income tax reform proposals.  Like Doran, Sullivan emphasizes heterogeneity of interests.  It is possible to identify three broad factions in corporate tax reform:  global U.S.-parented multinational corporations, domestic incorporated businesses, and domestic unincorporated businesses.  And within each faction, there are significant differences in specific interests.  In his book, Sullivan devotes two chapters and an appendix to corporate tax expenditures, which are one main source of the differences between and within factions.

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