WILL WE GET TAX REFORM?

For a bit more on the administration's changes to the corporate tax code, check out this post from real life tax lawyer Daniel Shaviro. In particular, he offers a depressingly realistic take on the difficulties facing any effort to force corporations to pay higher taxes on investment abroad:

The efficiency gains from equalizing domestic and foreign tax rates faced by U.S. taxpayers might verge on being a slam dunk argument for the Administration's general position if not for one further problem. When we impose business taxes on legal entities such as corporations, rather than directly on individuals, we can only impose the U.S. tax rate, for investment abroad, on companies that are classified as U.S. residents. Unfortunately, corporate residence is an extremely weak reed for the imposition of U.S.-level rather than tax haven-level taxes. For new investments (as distinct from those already out there, which are hard to shift without paying a tax price), it is quite easy for investors to use non-U.S. entities.

In other words, closing some of these loopholes and eliminating some of these tax breaks might simply increase incentives for investors to use "non-U.S entities" that aren't in any way subject to domestic taxes.

The answer to this would probably be a full overhaul of the corporate tax code, not just action on a limited number of corporate tax breaks and loopholes. Indeed, Jason Furman, one of Larry Summers' deputies, makes the case for that today, and says that this is simply a "down-payment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations."

It would be nice if that were true. And maybe it will be. In a perfect world, you'd actually do tax reform before health reform or cap and trade. By making the tax code simpler and fairer, you'd make it much easy to deal with the implications of large policies that either raise or lower revenues. You could fund health reform through the tax code and use the money from cap and trade to create a very clear drop in tax rates. As it is, tax reform is an important issue, but it's never the maib crisis, and so no one quite wants to risk political capital on it.

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