One man's loophole is another man's R&D tax credit
"So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years -- without adding to our deficit. It can be done."
That, of course, was Barack Obama at the State of the Union, calling for corporate tax reform. But if you want to see why corporate tax reform will be so hard -- and why it remains such a longshot -- read Eric Toder's breakdown of the corporate tax code. The first number to keep in mind is $640 billion. That's how much the various breaks and deductions and off-ramps are projected to cost between 2011 and 2015. Wipe them all out and you could bring the rate down from 35 percent to 23 percent without losing a dime in revenue. Sounds great, right? Well, it won't sound as good once you hear what's hiding behind the word "loophole."
The largest estimated loss ($169 billion) over five years comes from deferral of foreign source income of U.S. multinationals. In the past, the revenue gain from eliminating deferral has been estimated as much smaller than the ongoing revenue cost under current law. And the corporate leaders now advising the President are likely pushing him to move in the opposite direction, following our major trading partners, who exempt foreign-source income. The second largest, accelerated depreciation of machinery and equipment, costs an estimated $147 billion. But this tax expenditure, which broadly subsidizes domestic investment for a wide range of business firms, has just been increased, with the support of the Administration, by allowing full expensing for investments made in 2011. The President has endorsed making the research credit permanent (scored at $13 billion over 5 years last year, but since increased because Congress extended it) and no one would even consider eliminating expensing of research and experimentation activities ($32 billion over 5 years).
Other items among the ten costliest provisions that seem unlikely to get chopped include the credit for low-income housing ($36 billion), accelerated depreciation on rental housing ($41 billion), and exclusion of interest on hospital construction bonds ($21 billion). Adding up all these items reduces the potential saving from $640 billion over 5 years to just $180 billion, or less than 10 percent of 5-year corporate revenues. And even getting this far would require eliminating alcohol fuel credits -- think, Iowa primary -- ($32 billion), the deduction for domestic production activities ($77 billion), preferential tax rates for small corporations ($16 billion), and all tax incentives for renewable energy ($26 billion, excluding alcohol fuels). The only tax breaks the President proposed removing in his speech were tax breaks for fossil fuels -- a mere $14 billion over 5 years.
Those won't be easy to get rid of. Some of them wouldn't even be wise to get rid of. And every time one "loophole" gets preserved, another group of corporations can make a stronger argument that their favored tax breaks should also be preserved. After all, do you really want less domestic production? Less research and development? Less clean energy investment? More corporations moving overseas?
Posted by: RobertBeard | February 7, 2011 6:56 PM | Report abuse
Posted by: pdrub | February 7, 2011 7:32 PM | Report abuse
Posted by: chrisgaun | February 7, 2011 10:22 PM | Report abuse
Posted by: staticvars | February 7, 2011 10:56 PM | Report abuse
Posted by: madjoy | February 8, 2011 4:25 PM | Report abuse
Posted by: hotbbq | February 9, 2011 11:39 AM | Report abuse