A new strategy for corporate tax reform

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  • Perhaps the President should have done more than issue a document saying, "the President is committed to reform...."

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  • Maybe all sides should agree to try a new approach.

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  • Let's either go small and get something done or go big with a cause worth fighting for.

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Last Friday, Prime Minister Shinzo Abe of Japan proposed to cut the Japanese corporate tax rate from 36 percent to below 30 percent. This is the latest step on a journey that began on April 1st 2012 when the government set in motion a series of rate cuts - from 41 percent to 38 percent to today's 36 percent. In 2013, both major parties in Japan agreed to accelerate the timetable for the cuts. Today Japan may be ready to double down.

Over the last two years, Abe and the rest of the Japanese government have driven their corporate rate from the highest in the developed world towards the average for developed countries, which hovers around 25 percent.

These reforms are taking place despite Japan's crippling public debt and the aftermath of the Fukushima Daiichi nuclear disaster. Through creative policy-making - Japan has raised its national sales tax from 5 to 8 percent to replace revenue - and an eye towards making Japan a friendlier place for investment, the government has enacted a policy that will almost certainly strengthen Japan's economy.

During the same period, American politicians on both sides of the aisle have spent considerable time talking about corporate tax reform. In February 2012, the White House and Treasury department issued a whitepaper calling for corporate tax rate reductions. During the 2012 election, both the Democratic and GOP platforms called for reductions. In 2013, Democrat Max Baucus, then the Senate Finance Committee Chairman, proposed a corporate tax rate below 30 percent. In early 2014, Republican David Camp, Chairman of the House Committee on Ways and Means, proposed a 25 percent rate. But for all that conversation, there's been no action.

President Obama and both political parties publically agree that America's current corporate tax rate discourages investment, thereby reducing productivity, wages, and employment. Yet, still, no action.

There is probably enough blame to go around. Perhaps the President should have done more than issue a document saying, "the President is committed to reform...." Perhaps congressional leaders should have done more to identify areas of agreement. No matter, the current approach is clearly not working. Every reform proposed by President Obama or by a congressional leader seems expansive enough to inspire enemies, but not meaningful enough to inspire defenders.

Maybe all sides should agree to try a new approach.

One alternative is to play small ball. Have the necessary legislative leaders (and their economic advisers) sit down with a spreadsheet listing all corporate tax loopholes and how much the corporate tax rate could be lowered if each loophole were eliminated. Then snip away according to unanimous consent. Even a reduction of a point or two now could motivate further reductions later, as seen in Japan. Some opponents claim that loopholes should be saved to grease the wheels for a bigger reform deal, but we have been waiting for that kind of deal since 1986 and it is still nowhere to be seen.

As a bonus, small-ball tax reform would generate valuable data that economists could use to better understand the effects of corporate tax cuts, making it easier to get more done in the future.

A second alternative approach is much bolder: change the entire game. Rather than discuss corporate tax reform, discuss business tax overhaul. Two types of overhaul would offer big improvements over the current system. One would allow all investments to be deducted immediately rather than written off over time. Another would eliminate the corporate tax entirely and instead tax stockholders on corporate income.

Either one of these overhaul designs would create new problems for Congress, but they would also offer big gains. Both would encourage investment in the United States, increasing the size of the economy and the standard of living of American workers. They would also reduce the tax-induced incentive for companies to load up on debt, making companies less likely to fail in the face of economic adversity such as the recent financial crisis.

It is time to try something new. Let's either go small and get something done or go big with a cause worth fighting for.

Matthew Jensen is an economic researcher at the American Enterprise Institute (AEI).

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