Corporate Taxes: Change in the Making

Washington Matters

Corporate Taxes: Change in the Making

Some powerful forces are going after the corporate income tax -- everyone from George Bush to John McCain to Barack Obama's new economic adviser, Jason Furman. A flatter and fairer tax seems like a good possibility...and some want to go even further and just get rid of it.


John McCain is determined to make it a campaign issue. Every time he talks about tax cuts, he highlights his plan to slash the top rate on corporate income taxes to 25% from 35%. He argues that the

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Barack Obama talks about eliminating many of the loopholes McCain ignores, but he has been silent on a rate cut. There's a reason: Corporations are villains in the eyes of many diehard Democrats, but by picking Furman as his top economic adviser, Obama guaranteed that he'd get an earful on the evils of the corporate tax. Furman and his mentor, former Clinton Treasury Secretary Robert Rubin, have called for cutting the rate to 30.5% and for streamlining the code to make it fairer and simpler. He says the loopholes push companies into making investment decisions based on tax implications rather than on what's in their best business interest. A similar plan has been offered by Rep. Charles Rangel, the Democratic chairman of the House Ways and Means Committee as part of a broader tax bill. Bush objects to other elements in the bill, but he, too, favors an overhaul of the corporate tax system.


Some economists advocate eliminating the corporate tax, on the grounds that people, not companies, end up paying it. They say the cost is merely passed on to shareholders who see smaller profits, consumers who pay higher prices and workers who get lower wages. But an argument can be made (and often is) that wages and prices are controlled mostly by market forces, not tax rates. Those who make that case say it's mostly shareholders and top executives who pay the tax and for the most part, they can afford it.


Robert Reich, who served as labor secretary in the first Clinton administration but has since parted ways with Clinton on many issues (he endorsed Obama), argues for eliminating the corporate tax in his recent book, Supercapitalism. Reich thinks shareholders should pay the tax on company profits directly -- at the shareholder's ordinary tax rate. He thinks companies would make wiser decisions if that were the case and that this would help the economy as a whole. Reich adds that this would also solve another problem. Because companies pay taxes, they're considered stakeholders and get a say in political policy to which they shouldn't be entitled.


It's hard to hear all this and not begin to hope that real change is on its way -- assuming the old gridlock of Washington doesn't derail a compromise. It's the kind of governing that Obama and McCain are both promising.