Breakout

Is Corporate Tax Reform Dead?

Breakout

Lost amongst the chaos that preceded the last-minute passage of the fiscal cliff bill on New Year's Eve was a basket of corporate tax breaks that raised an array of taxes on individuals to the tune of $1 trillion over the next 10 years. While some observers cried foul over this "Crony Capitalist Blowout," much of the coverage and analysis focused on the ''tax the rich'' rhetoric and attempted to gauge the economic and political risks that a 2% payroll tax hike carries.

But despite this one-time windfall (which saved billions for the likes of Nascar tracks, wind farms and biotech lab), the push for lower corporate taxes is unashamedly back in Washington. This time, America's biggest businesses want their tax bills reduced.

"Right now the U.S. has the top statuary rate in the world at 35% for corporate taxes," says Ed Mills, Washington policy analyst at FBR Capital Markets. "But the reality is, the effective rate for most businesses is actually much lower."

In fact, in many well-publicized cases, such as at General Electric (GE), Berkshire Hathaway (BRK) and Whirlpool (WHR), the effective rate is actually zero, as long-running tax losses are used to offset current taxes.

While the same rate discrepancy exists for individual taxpayers, Mills explains, the focus of the next round of corporate tax reform will be less about closing loopholes and more about looking for new revenue in the only place left untouched.

"There's a lot of things, when you look at the tax code, that are pretty indefensible when you start having the debate," Mills says. He adds that if entitlements are off the table, "the only other place where we can reform is on the corporate side, and that is why we have attention there."

So contrary to what you may think, "tax reform" is really about paying more. As much as that seems fair given the increasing burden on individuals, Mills says some sort of carrot-and-stick approach will likely emerge to incentivize businesses to invest domestically rather than stash billions of dollars abroad.

At least that's the thought. The catch is, as the latest GDP figures amply demonstrate, "we're in a very fragile economy" and lawmakers are loathe to do anything to hamper the recovery.

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