Closing Corporate Tax Loopholes Is Easier Said Than Done

Realistically, politicians have too much to lose

     

Herman Cain’s surprising surge in the race for the GOP nomination this week can be at least partially attributed to the appeal of his 9-9-9 tax plan. Although he is short on specifics, the basic idea is to eliminate all special deductions and move to a flat corporate rate of 9%. Clearly, this former CEO has tapped into something widely appealing.

Democrats and Republicans do not appear to agree on anything in this caustic political season. However, both parties have supported the general idea of simplifying the corporate tax code to lower the rate.

On paper, U.S. corporations pay a very high rate of taxes as compared to their counterparts overseas. However, given the wide array of credits, deductions and subsidies (i.e. “loopholes”), many companies actually pay a low rate — or no tax at all. Creating a more simple and fair tax code seems commonsensical. But the details of such an endeavor probably are insurmountable.

Although the details of the 9-9-9 plan remain vague, we can surmise the basics. The first phase of Cain’s plan has three main elements: eliminating most credits and deductions for individuals and corporations; imposing a flat tax on income and creating a new national sales tax. Ideally, Cain would like to eliminate all federal taxes and replace them with a national sales tax of 30%.

Eliminating credits and deductions completely and replacing them with a lower, flat corporate tax rate has also been endorsed by Jon Huntsman and other GOP leaders. While the simplicity of this idea is appealing, the effects of such a radical transformation would be extraordinarily complex.

The corporate tax code basically is a massive system of rewards and penalties for certain behavior. (For that matter, so is the individual tax code. We’ll look at that separately.) Some of these rewards are small and specific — tax credits that congressmen have parceled out to their favored constituents. For example, Senate Minority Leader Mitch McConnell, of Kentucky, already is making noise about keeping the tax credit for horses in Kentucky. Sen. John Kerry, D-Mass., continues to support a credit that benefits the Samuel Adams Brewery in Boston.

 
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