Corporate tax reform may be just around the corner

For all the partisan squabbling in this bizarre election year, a consensus has emerged in one important area: The U.S. corporate tax system is broken.

No matter who wins on Nov. 8, there’s surprising agreement that change is coming. To get ready, think tanks are pumping out reform proposals, tax experts are updating their research and Congress is holding hearings.

Both Hillary Clinton and Donald Trump have plans. But the one most popular among politicians and scholars is by House Speaker Paul Ryan, R-Wis., who is offering a type of consumption tax to fix a multitude of problems with the existing code. His plan, however, could destabilize U.S. financial markets, especially the bond market. It may also violate the U.S.’s trade commitments.

The ease with which multinational corporations avoid taxes is just one of many problems with the existing tax code. The top U.S. rate of 35 percent, the highest in the industrialized world, pushes companies to game the system. A good example is Apple’s sweetheart deal with Ireland, in which Apple created “stateless income” and paid an effective tax rate of 0.005 percent.

The tax code also encourages companies to invert – merge with overseas firms and adopt their legal address – to obtain lower tax rates. Because overseas profits are taxed once they are repatriated, companies are also stashing more than $2 trillion abroad, denying the United States of funds that could be put to work creating jobs and spurring growth.

The current system also discourages investment by taxing corporate profits twice, once at the company level and again at the individual level as dividends.

Clinton often calls on corporations to pay their “fair share” of taxes, and has already decided where she’d spend a $275 billion windfall from corporate tax reform (on a burst of infrastructure spending). But she hasn’t yet said where she would set the top rate or which tax breaks she would end. Clinton has been specific only when it comes to stopping companies from inverting.

Trump’s most recent plan would end many deductions and slash the top corporate rate to 15 percent. He would cut corporations’ tax burden (and government revenue) by almost $2 trillion over a decade, by one estimate.

Ryan would lower the top rate to 20 percent and move the U.S. toward a tax on consumption with something called a destination-based cash-flow tax, developed by Alan Auerbach of the University of California at Berkeley.

Everyone will have an incentive to compromise, no matter who wins on Nov. 8. Clinton has big plans to spend the proceeds from tax reform. Trump will want to prove he can govern. Ryan will want to showcase his ideas to end Washington gridlock. What better way to do this than to fix the corporate-tax mess?

This story was originally published October 10, 2016 at 5:01 AM with the headline "Corporate tax reform may be just around the corner."