Reform Corporate Taxes or Suffer the Consequences, Report Says

There is general agreement that congressional action on tax reform will wait until next year. But waiting any longer could hurt U.S. companies’ efforts to compete at a global level, according to a new report from the Harvard Business School.

The report, authored by HBS professors Mihir Desai, Michael Porter and Jan Rivkin, paints a bleak picture of the current political scene on major issues that the business community and the public believe could stimulate the economy. Among the most prominent of these issues is corporate tax reform, which the authors note has become almost politically untouchable because of populist messaging over the past few years.

That’s not for lack of trying, or at least talking about trying. Lawmakers from both parties have discussed the need to overhaul the tax code for years, highlighting in particular the outdated U.S. corporate tax rate, which is higher than in most other developed countries. House Speaker Paul Ryan (R-Wis.) included a corporate rate change in a broad tax plan unveiled earlier this year, but his outline lacks the details to indicate whether it will work or if it can garner the necessary support in Congress.

The Harvard authors describe corporate tax reforms as “arguably the most important and actionable policy steps which would almost immediately spur growth and increase corporate investment in the United States.”

“Democrats and Republicans say they agree that the rate needs to come down but have wasted more than four years quibbling over a compromise number,” the authors write. “Meanwhile, American companies continue to seek complicated corporate tax structures to mitigate the tax burden. The result is that in an era of high corporate profits, our tax policy has driven more investments (and corporate taxes) to other countries, and the U.S. has suffered.”

Corporate tax reform is at the top of an eight-point plan that the HBS report’s authors say could help stimulate growth. But the current level of political polarization and legislative gridlock poses a major barrier to lowering the corporate tax rate. Still, the report says there is enough consensus on corporate tax issues that legislation is achievable. (Some of the other ideas the authors say would grow the economy include beefing up investment in public infrastructure, streamlining the immigration bureaucracy and simplifying regulations. All of those ideas face different political barriers.)

Tax reform, however, could be written in a way that is acceptable to everyone. “The feasibility of corporate tax reform is promising given the broad consensus on the nature of the problem and the required direction for reform,” the report says. “Business leaders reported overwhelming and bipartisan support (over 95 percent) for corporate tax reform. Consensus corporate tax reforms included a reduction in the statutory rate by at least 10 percentage points, moving to a territorial tax regime, and limiting the tax-free treatment of pass-through entities for business income.”

In a Tuesday interview with Morning Consult, Desai said it’s possible that tax reform could come about next year because a political window will open with a new Congress and a new president. In addition, he said, the current problem of companies moving their headquarters overseas for tax reasons will be the “tip of the iceberg” of the country’s economic woes if lawmakers don’t take action.

To think of these corporate inversions as “some weird thing that companies do” doesn’t reflect the magnitude of the occurrence, he said. “It’s a manifestation of a bigger problem. … The consequence of that over time is that we’re just going to see more and more foreign acquirers of U.S. assets.”

Action on individual taxes is less likely, the report’s authors say, in part because the business community cannot agree on what types of changes to the individual tax code are warranted.

Bringing in a new tax on carbon emissions could help raise revenues lost by the cuts in corporate and individual tax rates, the report says. The carbon tax polled better with HBS alumni than a consumption tax, another way of raising revenue.