Widening corporate tax loopholes

The following editorial appeared in Friday’s Washington Post:

This week, two more U.S. companies moved to reestablish themselves overseas, allowing them to pursue lower corporate tax rates. They will join dozens of others who have chased lower tax bills abroad while maintaining operations in the United States, benefiting from the U.S. business climate, legal stability and research investments without helping to pay for these advantages. Treasury Secretary Jack Lew pressed Congress on Tuesday to close the avenues in U.S. law that allow companies to evade corporate taxes by moving to foreign countries.

Instead, just last week, the House passed a bill that would make it more difficult to keep U.S. companies in America.

On Friday the House voted to make permanent a tax provision known as “bonus depreciation.” This policy allows companies to immediately write off half the cost of investments in various types of durable equipment. The original idea was to make this scheme temporary, encouraging firms to invest immediately while the tax benefit was in place, providing a jolt to the economy during the Great Recession. But studies suggest it did not offer much of a stimulus, and making it permanent doesn’t make sense if that’s the aim.

Advocates of bonus depreciation now argue that the policy is more attractive as a permanent fixture in the tax code because it encourages companies to invest in capital equipment, which could boost productivity and employment over long periods of time. That may be true.

But many economists point out that writing bonus depreciation into the permanent tax code would likely have another effect: making it harder to reform corporate taxation in a way that lowers rates for many businesses, including those that might otherwise bolt overseas. The nominal U.S. corporate tax rate is higher than those of many of the country’s international competitors. But some U.S. companies pay relatively low effective tax rates because the code is shot through with special-interest loopholes. By clearing away many of those loopholes, Congress could reduce the top-line rate and raise revenue in the process.

Bonus depreciation, a carve-out for specific sorts of capital investments, is the kind of loophole that could be reduced or eliminated to help finance a corporate tax rate cut. Embedding it in the tax code, by contrast, would cost $276 billion over a decade and would make it very hard to broaden the corporate tax base and lower the corporate tax rate.

Some in the Tinkerbell school of economics argue that there is no such trade-off. By using “dynamic” estimates of the effects of making bonus depreciation permanent, which attempt to quantify the economic consequences of such a move, they claim that the policy would actually increase federal revenue even in the context of a broader rate-lowering reform. Congress should not bet the viability of the broad corporate tax reform that the nation needs on this sort of wishful estimating.

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