How would the “President’s Framework for Corporate Tax Reform” pay for cutting the corporate rate?

The pay-fors that the Administration proposes (and I note that the White House has co-signed the document, not just attributed it to the Treasury Department), include the following:

1) "Eliminate dozens of business tax loopholes and tax expenditures" - In addition to a general statement about a presumption in favor of eliminating tax expenditures (standing in considerable tension with the document's later advocacy of tax preferences for domestic manufacturing), the White House and Treasury do indeed specifically identify the following items as worthy of repeal: LIFO inventory accounting, oil and gas tax preferences, insurance industry tax benefits and planning loopholes, the carried interest rules, and special depreciation for corporate purchases of aircraft.

OK, as in my critique of the Romney plan, I should note the political feasibility issues here. Harder sledding to enact these base-broadeners than to lower the corporate rate. And, as other commentators have noted, the Democratic base (and perhaps some unaffiliated voters as well) are bound to love some of this stuff, making it less of a profile in courage than otherwise (although the fact that one party's supporters actually favors at least some instances of base-broadening is not exactly irrelevant). But at least the White House is listing the items that it advocates repealing, and is insisting that the overall package should be revenue-neutral without regard to fantasy-based "dynamic scoring."

2) "Reform the corporate tax base to invest savings in cutting the tax rate and reducing harmful distortions - Here they suggest (a) moving towards more neutral (as between assets) economic depreciation, (b) reducing the corporate tax bias towards debt financing, such as by reducing corporations' interest deductions, and (c) "establishing greater parity between large corporations and large non-corporate counterparts," although they call it "essential that any changes in this area ... not affect small businesses."

Certainly (a) has it virtues. Note, however, that, in the middle of an ongoing recession (substantively in terms of persistent unemployment, even if not as officially measured), accelerated depreciation for new assets can be more stimulative than lower rates, making the Administration's proposed package potentially anti-stimulative. Note also that expensing for everything, if set in a thoroughgoing consumption tax framework (rather than plunked into the middle of an income tax) creates full inter-asset neutrality, as attempting imperfectly to design more economic depreciation rules cannot.

I would consider (b), defined as greater debt versus equity neutrality, an important priority. However, disallowing interest deductions (rather than extending them to equity in a proper and budgetarily responsible overall framework) may not be the best way to do it. But the suggested proposal of course reflects the budgetary bind that we are in.

As for (c), they cite prior studies but don't advocate anything in particular. Again, this is an important issue that needs to be addressed in the context of corporate rate reduction.

By the way, one problem with cutting corporate rates while not addressing the relationship between the entity-level and shareholder-level taxes is that it makes the assessment of neutrality between different entities quite confusing. You get very different results if you assume (a) that some shareholder-level tax is going to be paid at some point, versus (b) that the shareholder-level tax can be wholly avoided by holding one's stock until death and then selling it for zero gain due to the tax-free step-up in basis. Unfortunately, in the real world we face both scenarios.

3) "Improve transparency and reduce accounting gimmicks" - Here the aim is to "increase transparency and reduce the gap between book income, reported to shareholders, and taxable income, reported to the IRS. These reforms could include greater disclosure of annual corporate income tax payments."

The last of these points - greater disclosure of annual corporate income tax payments, and also, I would add, of the sources of book versus taxable income differences (which are reportable to the IRS, but confidentially) - is something that I believe would have great value, though not primarily as a corporate tax reform pay-for. I believe someone wrote an article a few years ago about partially adjusting corporate taxable income towards book income, with a key reason for doing it only partially being that the last thing we want is for the Congress to take a greater interest than it already does in how the Financial Accounting Standards Board defines book income.

In sum, there is some real substance here. One would like to have a lot more, but it certainly goes well beyond that in the Romney plan. On that distinction, it would be fair for the Romney people to respond that they do not currently have the resources of the White House and Treasury staffs behind them. Plus, they still need to secure the Republican nomination. And they might certainly score a valid ad hominem point by noting that it's a lot easier for a Democratic administration to name corporate tax revenue-raisers that it favors, than it would be for them to name revenue-raisers for rich people that they favor. But that's part of the point - even if good tax policy instincts are to be found both in the Obama Administration and in a hypothetical Romney Administration, surely it is relevant that the former would likely have an easier time selling the pay-fors to its own party. (Not that either seems likely to succeed in the end.)

My next post will say more about the other two topics in the President’s Framework for Corporate Tax Reform: domestic manufacturing incentives and international taxation.

One last comment here: obviously both the tone and substance of this comment are rather different from those I turned on the Romney proposal in my earlier posts. This fits in with the fact that I will definitely support Obama against Romney (or whoever else gets the Republican nomination) this November. So call me partisan in that regard, if you like. But the fact is that I want to be, and (to the extent the Republicans permit it) try to be, above the fray and even-handed.

As I see it, the Republicans went mad around 1994 and have only gotten worse since. I myself didn't fully realize this until 2002 at the earliest (call me slow on the uptake). They need to return to sanity - as I believe Romney would under different political circumstances, but unfortunately not under our actual ones - and only then can one's quest for balance (both real and perceived) lead to parity of assessment. If you look at the Romney tax plan and the Administration's corporate tax reform framework side-by-side, there is simply a clear difference between them - although also, interestingly, some elements of overlap (e.g., both support corporate base-broadening alongside rate reduction, and for that matter the Romney plan to limit tax benefits for high-income taxpayers may resemble Administration proposals to limit the value of tax benefits in higher brackets).

In my view, it's more genuinely even-handed not to look for false equivalence just so that one will appear more balanced, even as one labors to stay open-minded about any elements of true equivalence.