The Pak Banker - - OPINION -

T'S just far-fetched to be­lieve that Congress would lower cor­po­rate rates at the ex­pense of small busi­ness," says Rep­re­sen­ta­tive Devin Nunes, a Cal­i­for­nia Repub­li­can. That, in a nut­shell, is why cor­po­rate-tax rates are un­likely to fall, even though there is a bi­par­ti­san con­sen­sus that they're too high. Nunes may, how­ever, have the be­gin­ning of a so­lu­tion. A lower rate would lead to more in­vest­ment, and thus higher wages, in the U.S. But most busi­nesses, es­pe­cially small ones, don't pay cor­po­rate taxes. They file un­der the in­di­vid­ual in­come-tax code, partly be­cause it treats in­vest­ment bet­ter than the cor­po­rate code does. Th­ese busi­nesses have no stake in see­ing the cor­po­rate-tax rate fall -es­pe­cially since their own taxes just rose at the start of the year, when the Bush tax cuts on high earn­ers ex­pired.

Both the White House and Repub­li­can Se­na­tor Rob Port­man of Ohio are will­ing to tackle cor­po­rate-tax re­form in iso­la­tion from the rest of the tax code. Many mem­bers of Congress will balk, how­ever, at en­act­ing a 25 per­cent cor­po­rate-tax rate just af­ter let­ting rates on a lot of small busi­nesses rise to 39.6 per­cent (and even higher in prac­tice, once some features of the tax code are ac­counted for). Port­man is iso­lated in his party on this is­sue.

Re­form­ing the en­tire code, in­di­vid­ual and cor­po­rate alike, doesn't hold much prom­ise, ei­ther. There is no bi­par­ti­san agree­ment that the top in­di­vid­ual rate should fall. Nor is there any agree­ment on which tax breaks to elim­i­nate or re­duce to pay for lower in­di­vid­ual rates. So the two most ob­vi­ous paths for a cor­po­rate rate re­duc­tion -- a re­form of the cor­po­rate code, or of the whole tax code -- ap­pear to be blocked.

That's where Nunes comes in. He sug­gests a new ap­proach: a "busi­ness con­sump­tion tax" that treats all busi­nesses the same, what­ever their or­ga­ni­za­tional form. In­stead of tax­ing their in­come, it taxes their cash­flow -- in­come mi­nus ex­penses, ex­cept for in­ter­est pay­ments. That way, busi­nesses would no longer write off their in­vest­ments ac­cord­ing to a com­pli­cated de­pre­ci­a­tion sched­ule. In­vest­ments would be tax-free.

Both U.S. and for­eign com­pa­nies would have more rea­son to in­vest here, Nunes says. "This would make the U.S. the largest tax haven in hu­man his­tory."

I've run across two ob­jec­tions to Nunes's idea. The first is that it is sim­ply too am­bi­tious to be po­lit­i­cally vi­able: If Congress is hav­ing trou­ble re­form­ing the cor­po­rate tax, goes the ar­gu­ment, it won't be able to di­gest an en­tirely new ap­proach to tax­ing busi­ness in­come. What this ob­jec­tion ig­nores is that the mod­er­ately am­bi­tious pro­pos­als all face ob­sta­cles that are prob­a­bly in­su­per­a­ble -- ob­sta­cles this pro­posal avoids. The sec­ond ob­jec­tion is that Nunes's pro­posal would cost the fed­eral government a lot of rev­enue. A Joint Com­mit­tee on Tax­a­tion es­ti­mate of the pro­posal's bud­get im­pact would make it pos­si­ble to eval­u­ate this claim, but it sounds plau­si­ble. If it turns out to be ex­pen­sive, though, the con­cept can still work: The tax rate would just have to be higher than the 25 per­cent that Nunes has ten­ta­tively put for­ward.

Even if the rate were left at the 35 per­cent that cur­rently ap­plies to cor­po­ra­tions, the shift to the new tax would still be a boon for the econ­omy. The statu­tory rate would be higher than that of other coun­tries, but the num­ber that mat­ters -- the ef­fec­tive tax rate on in­vest­ments -- would be a very com­pet­i­tive zero, thanks to com­pa­nies' abil­ity to write off their costs im­me­di­ately. Elim­i­nat­ing the de­duc­tion for in­ter­est, mean­while, would end a desta­bi­liz­ing dis­tor­tion in the econ­omy: the fed­eral tax code's pref­er­ence for cor­po­rate fi­nanc­ing via debt rather than eq­uity. That pref­er­ence also gives an ad­van­tage to es­tab­lished firms that have greater bor­row­ing ca­pac­ity than star­tups.

If Congress still finds the Nunes pro­posal too am­bi­tious to con­tem­plate, it could un­der­take re­form on a much smaller scale. Leave tax rates alone, keep the sep­a­rate sched­ules for dif­fer­ent types of com­pa­nies, and just make a trade: Com­pa­nies would get im­me­di­ate write-offs on in­vest­ments and in re­turn lose the in­ter­est de­duc­tion. That trade would prob­a­bly leave the government's rev­enue at roughly the same level. It would cer­tainly be sim­pler than most other pro­pos­als to re­form busi­ness tax­a­tion. And it would en­cour­age more in­vest­ment and less debt.

Two things have to hap­pen for th­ese ideas to have a chance. More peo­ple in Washington must re­al­ize that the con­ven­tional ap­proaches to th­ese is­sues aren't go­ing to work. And they will have to start lis­ten­ing to Nunes.

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