Commentary

Three Cheers for Three Corporate Tax Breaks

As the economic stimulus package winds its way through Congress, critics are decrying many of the proposed tax cuts as unhelpful giveaways to corporate America. The obscurity of some provisions in the bill that passed the House of Representatives do cause suspicions. Is $21 billion to “extend exceptions under subpart F for active financing income,” really warranted? As it turns out, yes, this tax cut and other business provisions in the bill are needed reforms that will broadly benefit the economy.

To provide some perspective, remember that the corporate income tax is simply a smoke screen that hides $200 billion in taxes from the workers, consumers, and shareholders who implicitly pay it. Corporations simply pass the tax through in the form of lower wages, higher prices, and lower shareholder returns. And this is a very expensive smoke screen: One recent estimate found that it costs $40 billion for firms to comply with the paperwork required for the corporate income tax. This is why Treasury Secretary Paul O’Neill has said we should consider eliminating the corporate income tax altogether.

We can help U.S. businesses in the short-run and move toward that long-run goal by eliminating the most inefficient parts of the corporate tax. Consider the House proposal to repeal the corporate alternative minimum tax (AMT). The AMT is an unneeded parallel tax system clamped on top of the regular corporate tax. The former IRS National Taxpayer Advocate Val Oveson urged that the AMT be repealed calling it “absolutely, asininely stupid.” In more diplomatic language, the congressional Joint Committee on Taxation has also called for repeal because “the original purpose of the corporate AMT is no longer being served in any meaningful way.”

The AMT hits companies particularly hard during recessions so current repeal would be particularly timely. Some pundits are complaining that some large companies would stand to gain hundreds of millions of dollars from repeal. But these refunds relate to AMT credits already allowed under current law and built up ever since 1986 when this tax was enacted.

Or consider the liberalized depreciation provisions in the bill. These respond to the new economic reality that business equipment becomes obsolete much faster than tax rules allow their expense to be written off. Many depreciation rules date back to guidelines established in 1962. A prominent association of tax accountants, the Tax Executives Institute, testified before Congress earlier this year that current depreciation rules are “hopelessly outdated and needlessly complex.”

Depreciation reform and AMT repeal would help get tax rules out of the way of productive investment by U.S. industry. The ultimate beneficiaries are workers since capital investment raises worker productivity, which in turn translates into higher wages. The boom economy of the 1990s illustrates how business investment, worker productivity, wages, and incomes all rise in tandem.

What about the $21 billion Ways and Means proposal to “extend exceptions under subpart F”? U.S. financial companies have complained for years that they are unfairly taxed on their foreign earnings. This proposal would put financial companies more in line with non-financial companies by taxing them when foreign profits are repatriated to the U.S., not when they are initially earned abroad. Other industrial countries don’t tax the foreign profits of their financial companies as aggressively as the U.S. does, so this proposal would reduce the competitive disadvantage we impose on U.S- headquartered companies in world markets.

Already facing hardship, the New York-based financial industry is too important for the government to penalize with unfair tax rules. After all, the banking, insurance, and securities companies that would benefit from this tax provision are exactly the type of high wage, high growth firms that we want to thrive in the new economy. Ultimately, the U.S. should move to a much simpler and more competitive “territorial” tax system where we don’t tax business profits earned abroad at all. This tax cut is a step in that direction.

No one can guarantee that these tax proposals, or other stimulus ideas, will quickly boost the economy out of recession. But these reforms are needed anyway, and they certainly will add to economic growth in the long run. So reporters and pundits should look beyond the superficial fact that these provisions are supported by flocks of corporate lobbyists. In this case, what is good for corporate America is good for the U.S. economy.

Chris Edwards is director of fiscal policy studies at the Cato Institute.