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​Why voter anger won't translate into corporate tax reform

Although the post-electoral glow of victory has some Republican lawmakers talking of reaching across the aisle on key issues, progress is likely to prove elusive. Case in point: Corporate tax reform.

The issue of lowering the tax rate for U.S. corporations has been bandied about as one way to make the country more competitive for businesses. It's also been noted as one way to squelch so-called tax inversions, when companies lower their taxes by shifting their headquarters outside U.S. borders.

Are these companies unpatriotic?
Are these companies unpatriotic?

Even though the Republicans gained a Senate majority in the midterm elections, the issue of corporate tax reform remains complicated, and actual movement on the issue remains unlikely, albeit somewhat more possible with the shifting political balance in Congress. The details of hammering out reform would be extremely complicated, and a host of differing views on how to accomplish the task can be found even among supporters. On top of that, even if corporations are in favor of lowering the tax rate, it's not likely to be a popular move with many voters.

"With the Republicans controlling both chambers, that makes corporate tax reform less unlikely," notes Alan Viard, a resident scholar at the American Enterprise Institute, where he focuses on federal tax and budget policy. "I don't want to say it's more likely, because there's a chance of it happening, but it's still unlikely. There are too many obstacles that could derail it."

Tax inversions grabbed President Obama's attention this year, given a surge in the number of large U.S. corporations that took up the strategy. While it's not a new tactic, the pace has picked up in recent years, with companies such as Mylan (MYL) buying generic drugmaker Abbott Laboratories (ABT), creating a new Netherlands-based firm that will drop its tax rate to less than 21 percent.

Critics have complained that America's high statutory corporate tax rate, which stands at 35 percent, is one of the highest in the world. Research has shown that many companies pay much less, however, thanks to loopholes in the tax code. On average, corporations paid a rate of 12.6 percent in 2010, according to research from University of Southern California law professor Edward Kleinbard.

"The effective rate is much harder to measure, and there is a lot of dispute on how to measure that," notes the American Institute's Viard. Even so, he added, the U.S. is probably "in the middle of the pack" when one looks at countries' effective tax rates.

The issue of corporate tax reform is impacted by that and other ambiguities, such as the fact that much of the country's business investment takes place outside of the corporate structure, such as through sole proprietorships and LLCs, he added.

"There are conservatives that want tax reform to be comprehensive, and as long as they insist on that," it's unlikely corporate tax reform will happen, said Marty Sullivan, the chief economist for Tax Analysts and a former staff economist for the U.S. Department of the Treasury. He added some observers "have no idea of the difficulty of doing corporate tax reform. For folks like me who work on it all the time, we don't see much change."

Nevertheless, the changing complexion of Congress appears to demonstrate voter anxiety about the economy. Seventy-one percent of voters in an exit poll conducted by CBS News said the economy is not so good or poor. Only one-third said they believed the economy is getting better.

"The recovery seems to be picking up a little bit, thank heavens, but the case has been frustratingly slow," Viard said. "The great recession ended more than five years ago, and it's been a lackluster time at best for the economy."

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