Time for corporate tax reform

Apple is not alone. Firms who have employed similar tactics include Google, Yahoo, Cisco, Microsoft, Hewlett-Packard, eBay, Amazon, GE, Verizon, Boeing, Exxon Mobil, Kraft Foods, Citigroup, IBM, Chevron, FedEx, American Airlines, J.C. Penney, Bank of America, General Motors, Nike, Dell, and American Express, among others.

However, corporate tax evasion highlights just one issue with the tax. Additionally, it has a high opportunity cost in terms of compliance and administration. The Laffer Center estimates that taxpayers pay $431.1 billion annually, or 30 percent of total income taxes collected, just to comply with and administer the income tax system.

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Third, the corporate income tax misallocates human capital. Joseph Stiglitz, former chair of the Council of Economic Advisers and World Bank Chief Economist, writes, “Google and Apple hire the most talented lawyers, who know how to avoid taxes staying within the law.”

Fourth, the corporate income tax includes billions in tax expenditures every year. Tax expenditures, as defined by the Budget Control Act of 1974, are revenue losses attributable to provisions of the tax laws that allow a special exclusion, exemption, credit, deduction, preferential rate of tax, or deferral of tax liability. In fiscal year 2013, the Joint Committee on Taxation estimates that corporate tax expenditures accounted for $150 billion.

Fifth, profits from C corporations are currently subject to double taxation. That is, shareholder distributions are taxed once as corporate income according to the corporate tax system and again when profits are distributed to shareholders according to the individual tax system.

Sixth, the corporate income tax rate, currently 35 percent, has been recognized as internationally uncompetitive. A recent report on business taxation and global competitiveness from the Treasury Department found that, within the Organization for Economic Cooperation and Development, the United States has the second highest corporate income tax rate.

Finally, the corporate income tax raises a decreasingly small amount of revenue. Since 1943, corporate tax collections have decreased 76 percent relative to today.

It’s time for corporate tax reform. The issue has received attention from President Obama, the House, and the Senate. Most recently, Obama proposed eliminating corporate tax expenditures to broaden the base, lower the rate, and use the increase in revenue to create jobs. Additionally, both House Ways and Means Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) have been touring the country to build support for the issue, with their committees also releasing several tax reform option papers and forming working groups.

It’s too easy for Washington to punt on the issue again. It must ignore the hyper-partisanship that currently plagues revenue issues, midterm elections being a little over a year away, and other items on the legislative agenda. It’s time for corporate tax reform.