Brian posted on July 15, 2012 14:33
In continuing the debate that HBS brought to Washington last week, I’m take a closer look at their second recommendation regarding Simplification of the corporate tax code.
As discussed previously, there are many ways to implement the HBS recommendations on global competitiveness. Therefore, I dug a little deeper into some of the latest literature and research out there regarding tax reform and did a little math to estimate the potential economic impact if these strategic priorities.
HBS Recommendation 2, Simplify the corporate tax code with lower statutory rates and no loopholes. Although the US has a corporate tax rate of 35 percent, the highest of the developed countries, the effective tax rate paid by corporations is actually closer to 26 percent. The last major overhaul of the US tax code was in 1986. Since then there have been over 14,000 changes to the tax code that has led to a tangled web of nuanced complexities.
At the Harvard Business School on US Global Competitiveness, Professor Mihir Desai gave an impassioned, well-informed, practical, and due to its practicality, likely dead-in-the-water discussion on reinventing the US corporate tax system. The three parts of his proposal include:
· First, the structure of the US corporate tax system should be competitive with the rest of the country given the global mobility of corporate intellectual capital.
· Secondly, the corporate tax reform should be instituted separately from any fundamental tax reform and must be revenue neutral.
· Thirdly, “any reform must relegitimize corporations as responsible corporate citizens and the corporate tax as a meaningful policy instrument.”
A report published by The Hamilton Project last month, A Dozen Facts about Tax Reform, lays out a nice argument for reform and a roadmap of ways to look at the issue. In addition, the Bush Administration convened a panel in 2005 to evaluate the economic impact of the current tax complexities. About the 14,000 revisions to the tax code since 1986, the Panel reported that the “these myriad changes decrease the stability, consistency, and transparency of our current tax system while making it drastically more complicated, unfair, and economically wasteful.”
The Panel estimated that, in 2004, “this complexity is costing the U.S. economy about $140 billion per year”, or “it is roughly the same as giving $1,000 to every family in America”. In addition to this cost of compliance, the IRS estimated in 2001 that due to the complexities of the tax code, there is an inadvertent underreporting of approximately $290 billion per year in taxes, representing an additional $2,000 per household. Adjusting for inflation, the estimated costs in 2013 of these are:
· Cost to Taxpayers of Completing and filing Taxes: $168.0 billion
· Cost to Government of Underreporting Taxes: $389.2 billion
The net effect to tax payers of these two factors are $221.2 billion in 2013 and set to increase to $250.7 billion by 2017. It is the combination of the cost of complexities and the ineffectiveness of collections that HBS made its recommendations. In addition, it is precisely the magnitude of the problem that HBS was adamant about making sure that these changes would be revenue neutral so that there is no net positive impact on taxpayers. But in taking HBR’s proposal one step further, there is enormous benefit of simplifying both the Corporate and Personal Tax Codes and making both of them revenue neutral by lowering the statutory personal and corporate tax rates.
Three additional points to keep in mind while revisiting the structure of the entirety of the US tax code include:
· The Buffet Rule
· Cuts in government spending costs jobs
· Paul Samuelson’s Observations on “G Spending”