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A Divide And Conquer Strategy On Corporate Taxes

Most of the smart people I know who have opinions about our leaky corporate tax code say we should lower the overall rate (now at 35) in exchange for sealing up all the holes that make it so leaky. I tend to agree with them, but it's obviously easier said than done. That is, the effective tax a lot of big companies face is really, really low. So to get them to go along with your grand bargain, you'd have to push the non-leaky tax rate down pretty low, too, which seems like it would cost you a lot in revenue from smaller companies less able to game the corporate tax code. For example, consider this detail from the Times today:

The top corporate tax rate is 35 percent, but the Treasury Department estimated that in 2004, the most recent year for which data is available, American multinationals paid $16 billion in taxes on $700 billion in foreign income — an effective rate of 2.3 percent.

I'd guess that helps push the overall effective rate paid by these multinationals far, far below 35 percent.

You're almost tempted to channel your inner Simon Johnson and grope for a political economy insight that Obama could deploy here. In particular, I suspect he'd have some success with a divide and conquer strategy, in which he signs up a bunch of those smaller businesses who pay a higher effective tax rate and uses their support to ram through a new tax regime over the objections of the big multinationals. 

If you go this route, I assume you set the new rate at precisely the point where it provides enough political support to pass over the objections of the holdouts (i.e., you keep lowering the rate until you've picked off just enough business support to get it done). I vaguely remember this sort of thing being tried with respect to corporate goodies in the past, so I'm guessing it's occurred to the White House, too.

--Noam Scheiber