The Agenda

Kevin Hassett and Glenn Hubbard on the Different Paths to Corporate Tax Reform

In today’s Wall Street Journal, Kevin Hassett of AEI and Glenn Hubbard of Columbia Business School describe the differences between the corporate tax reform proposals being advanced by President Obama, Rick Santorum, and Mitt Romney. The core points:

(1) There is growing evidence that the burden of the corporate tax is borne more by labor rather than by the owners of domestic capital, due in part to the increase in international capital mobility.

(2) Subjecting corporations to a much lower or much higher tax rate than noncorporate firms will tend to increase deadweight loss associated with the corporate tax.

(3) There is no good reason to give manufacturing firms a tax preference. 

Perhaps not surprisingly, given that Hubbard is one of Mitt Romney’s chief economic advisors, the authors conclude that Romney has the best approach to corporate tax reform. One of the virtues of the Romney proposal identified by the authors, however, is his top marginal tax rate of 28% for individuals:

Both would bring down rates on corporate and noncorporate income, though only Mr. Romney would do so in a revenue-neutral way (the Santorum plan adds greatly to federal deficits). According to one study, a top marginal tax rate on individual incomes of 28% as proposed by Mr. Romney, compared with Mr. Obama’s proposed top marginal rate of 39.6%, would increase the wage bill of noncorporate businesses by over 6%, raise investment by 10%, and push business receipts up by 16%.

It could be that Romney’s corporate tax reform is revenue neutral. But Romney’s broader tax overhaul implies a steep tax cut. To balance against the revenue loss associated with lower rates, as we’ve discussed, we’d need to see the elimination of popular tax expenditures and spending cuts so deep as to be incompatible with Romney’s call for delaying significant structural reform of entitlement programs until under-55s enter the system. 

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