Corporate tax crackdown just a start

(breakingviews.com) -- The Obama administration's crackdown on tax haven use by U.S. companies is expected to raise the effective corporate tax rate by 1.5 percentage points to something north of 20%. That still leaves it well below its 1994 level.

If profits revert to trend, the extra revenue - estimated at $210 billion over ten years, around $25 billion annually after their phase-in - won't lower U.S. deficits much. But combining fewer loopholes with a reduction in the 35% headline tax rate would be helpful.

Tax haven curbs were a major plank in President Barack Obama's election platform, and are politically appealing. Monday's batch of them appears to make sense and to close obvious loopholes.

But even at the administration's revenue estimate, the changes won't make much impact on trillion-dollar annual deficits. And that estimate may well be high, because companies will find other ways to get around some of the tax.

On the revenue side, the long-term trend in corporate taxes as a percentage of GDP is approximately flat. They accounted for 2.05% of GDP in 1993-94 and 2.13% in 2007-08 - similar economic years, albeit with the economy heading in opposite directions.

But corporate profits were a far higher percentage of GDP in 2007-08, so the net effective tax rate declined from about 24.1% in 1993-94 to 19.4% in 2007-08. That means that if profits revert to, say, their 1994 share of GDP, government tax revenues will decline, probably by more than Obama's plans are expected to raise.

It also shows how much room there is for tax clean-ups such as Obama's proposed changes to cut out loopholes so as to make room a reduction in the nominal 35% U.S. corporate tax rate, which is high by international standards.

Even if the administration's plans do push the effective corporate tax rate above 20%, that will still be well below 1993-94 levels - and by no means prohibitive. Eliminating these loopholes and others could keep the government's tax revenues intact while allowing the headline rate to be reduced.

That could cut down on companies' expensive tax avoidance strategies that sometimes push economic activity out of the U.S. A lower corporate tax rate with fewer loopholes might well be economically more efficient and yield more revenue.