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The Logic Of Tax Reform vs. The Logic Of Partisan Interest

The Obama administration is planning a major push to reform the corporate income tax. The U.S. income tax has one of the highest statutory rates in the world. But due to its massive profusion of loopholes and exceptions, it also has a very low effective rate. That's bad policy. Closing some exceptions and lowering the rate could raise the same amount of revenue in a far more economically-efficient way.

Companies that currently pay unusually low rates (because they enjoy lots of loopholes) would be losers, companies that pay unusually high rates (because they don't have many loopholes) would be big winners, and companies that pay around the average effective rate would, by dint of having a more efficient system, be small winners as well. In theory, you ought to be able to put together a coalition to make this happen, combining the big winners and the small winners. But then theory runs into realities such as this:

Some House Republicans are pushing for individual tax reform at the same time, with one top aide contending the administration “is leaving the American family out of the picture.”
“Their interest seems to be big business and whether they can win some corporate friends” ahead of the 2012 reelection campaign, the Republican said.

The GOP aide's first putative objection is absurd on its face. He opposes reforming the corporate income tax because this would not simultaneously reform (or cut) the individual income tax? No tax reform is better than partial tax reform? And since when do Republicans object to a pro-business measure that doesn't have some goodies for regular people? (The answer is: since never.)

But then the second objection gets into the heart of the matter. By driving the corporate tax reform debate, the administration probably will encourage business to at least split its political donations. And actually passing the thing would count as an important accomplishment for Obama, and it would be a major talking point to push back against conservative attempts to paint Obama as a frightening socialist. (Libertarian intellectual David Koch last night: "that is what I believe he truly is, a hardcore socialist. He’s scary to me.")

So it seems pretty clear that passing a corporate income tax reform, while improving public policy from virtually any ideological standpoint, runs counter to the Republican Party's political interest. So I think the result of this will be Republicans forging a strong alliance with the corporations that would stand to lose the most from a reformed tax code. Democrats can try to expose this strategy and gain support from companies that would win from tax reform. It could create pressure on republicans to go along. But the more likely outcome is that nothing passes.