Republicans and Democrats have both expressed a desire to reduce the corporate tax rate from 35 percent to something in the neighborhood of 25 percent, which would be more in line with our major trading partners. The recent attention to the legal loopholes employed by Apple, Google, Starbucks and other multinational corporations to reduce their taxes could threaten the prospects of reducing the corporate rate.
While lowering the corporate rate remains good public policy, the optics have changed. It feels a bit like putting up a yield sign because cars keep running the stop sign.
But the importance of the corporate tax rate goes beyond offshore tax games. A draft paper by Thomas Hemmelgarn and Daniel Teichmann [Tax Reforms and the Capital Structure of Banks] highlights the relationship between corporate tax rates and bank stability. Our tax code, like that of many countries, has a bias for debt over equity: interest payments to bondholders are deductible to the corporation, but dividend payments to shareholders are not. ...
If a corporate tax rate change is indeed on the horizon, analysts should watch banks’ balance sheets carefully. The paper confirms findings from previous research suggesting that banks will accelerate the recognition of tax losses before the rate change by increasing loan loss reserves before the change, effectively shifting corporate income forward to the lower-taxed period.
The aggressive gamesmanship by multinational corporations like Apple is disappointing, but it is not enough to simply say that we should close loopholes and keep the corporate rate high. The goal of bank stability should inform our decision-making about the design of the corporate tax, including the rate structure.