Ending Corporate Favoritism: Reforming Corporate Taxes & Subsidies to Create a Level Playing Field

Executive Summary

The Opportunity

America’s corporate tax code is a mess. At 39%, our top tax rate is among the highest in the world, but loopholes mean that many companies pay nothing.1 This system hurts our economy in several ways.

High corporate tax rates encourage cheating.2 Small companies under-report their income, while large companies exploit loopholes.3 As a result, middle-sized companies, which are too big to risk overt non-compliance and too small to lobby for loopholes, bear the burden. These companies pay tax rates higher than their smaller or larger peers and higher than similar companies in Germany and France.4 Such a tax burden drags down their ability to invest, limiting job creation and economic growth.

Perhaps worse, the whole system creates a culture of corruption.5 Politicians who help create loopholes raise more money than those who do not. Companies that invest in dodging taxes have lower costs than those that do not. Already, companies spend more than $100 billion annually to comply with taxes, and are steadily increasing spending on lobbying.6

Loopholes proliferate, and government revenues suffer7 – ironically defeating the initial purpose of the high tax rates. If we eliminated the favoritism riddling our tax code, we could lower our actual tax rates considerably, while bringing in more revenue.

The Challenge

Unfortunately, lobbyists and politicians bury their favoritism deep in the tax code and fight tooth and nail when their perks are challenged.8 As a result, piecemeal solutions will fail. Only a complete overhaul is politically viable.

The Solution: A Straightforward Action Plan

Fortunately, a combination of policy innovations can deliver the needed overhaul:

• Recommendation #1: Expose. The Government Accountability Office (GAO) should establish a program to track and publicize all business tax expenditures and outright subsidies.
• Recommendation #2: Target. A bi-partisan Corporate Tax Commission should meet annually to review and recommend elimination of up to $150 billion in annual favoritism (the amount of direct and indirect subsidies and tax expenditures to businesses).9 The Commission’s recommendations will be subject to a no-amendment up-or-down vote by the U.S. Congress. During subsequent years, the Commission will review expenditures and recommend additional reductions as appropriate.
• Recommendation #3: Redirect. Upon approval of the Corporate Tax Commission’s recommendations, the corporate tax rate will be lowered, with reduced tax collections offset by reduced corporate favoritism expenditures to make the reform budget neutral in the first year, with the possibility for using future reforms to reduce the deficit.This combination of steps attacks the systemic problems that favor the status quo, and will enable a coalition of Americans and corporations to get behind tax reform.