Annette Nellen
Annette Nellen

The Rough Road to a 28 Percent Corporate Tax Rate

A preliminary report from the Joint Committee on Taxation sheds light on what a system with a revenue neutral corporate rate reduction might look like.

November 10, 2011
by Annette Nellen, CPA, Esq.

The call for lowering the corporate income tax rate has received so much attention in the last few years, that it almost seems a given that the rate will drop. Proponents of a lower rate include President Obama, members of Congress, presidential candidates and many corporations. Several of these proposals have the caveat that the reduction be part of a revenue-neutral plan.

What has been absent in this discussion is the details of what a revenue-neutral package might look like and just how low the corporate rate can be reduced in such a plan. On October 27, 2011, the Joint Committee on Taxation (JCT) released "very preliminary" tables to provide a glimpse into what it will take to lower the rate.

This article summarizes the recent JCT data and what it means for the prospects of corporate-tax reform. Questions that need to be answered in developing a complete and realistic plan to reduce the corporate tax rate are noted as well.

Sample Proposals

Proposals for a specific, lower corporate income rate include one released October 26, 2011 by House Ways and Means (HWM) Committee Chair Camp (Comprehensive Tax Reform at the HWM website). His plan, the Tax Reform Act of 2011, calls for a 25 percent corporate tax rate. The preliminary plan includes numerous international tax changes, most notably, moving to a territorial system. Individual tax changes, additional corporate changes and other reforms are intended to be provided at a later date.

Presidential candidates Jon Huntsman and Mitt Romney have called for a 25 percent top corporate rate and Rick Perry suggests 20 percent. President Obama has also called for a reduction in the corporate rate in a revenue-neutral manner (with no specific rate called for). (See Pushing for Specifics on Tax Reform Proposals)

JCT Tables

The JCT tables released October 27, 2011 list existing tax expenditures in the same order they appear in the annual tax expenditures report that JCT released. Two sets of tables are provided. Table #11-1 133 shows the revenue effect of repealing provisions that all types of businesses (not only corporations) claim. Table #11-1 134 shows only the revenue effect of not allowing corporations to claim the special tax provisions. Several lines of each table indicate that the data is not currently available. The JCT data also shows the "cost" of lowering the corporate rate to a flat 28 percent. The summary data for a 10-year period covering 2012 to 2021 reveals:

Cost of reducing the corporate rate to 28 percent $717.5B
Revenue gain if expenditures are repealed for:  

C corporations only


All businesses


Thus, the revenue neutral rate achievable is 28 percent. To achieve a lower rate, other tax changes are needed, most likely the ones affecting taxpayers other than C corporations. While the preliminary data may look promising for a rate reduction to be feasible, there are several missing pieces and potential roadblocks that might make even a revenue-neutral 28 percent rate (let along a 20 percent rate) unfeasible.

Cautions, Obstacles and Areas for Further Study

  • As noted right on the JCT charts, the data are "very preliminary" with a lot of missing data. The JCT expects to improve its revenue-estimating models to derive better data.
  • It is not always clear how removal of some rules will affect other rules or corporate actions. For example, would removal of favorable treatment of R&D expenditures result in companies moving research and development (R&D) offshore? Will a 28 percent corporate-tax rate cause non-corporate businesses to convert to C corporations to enjoy the lower rate (although reduced deductions and credits)?
  • The JCT estimates assume no transitional relief is provided for the repealed provisions. For example, would current depreciation rules continue to apply to existing assets or would they need to shift to less favorable depreciation for the remainder of their useful lives?
  • Lawmakers might approach finding revenue offsets differently than only using the JCT's tax expenditure report. In other words, lawmakers may define tax expenditures more broadly than the JCT. For example, the JCT does not treat the net operating loss (NOL) carryover rule as a tax expenditure (JCT, Background Information on Tax Expenditure Analysis and Historical Survey of Tax Expenditure Estimates (JCX-15-11, March 9, 2011), page 8). Also, lawmakers may view some tax expenditures for individuals as attributable to corporations. For example, while non-corporate shareholders obtain the tax benefit of investing in qualified small business stock (Section 1202), the indirect benefit is for C corporations that derive increased equity from the provision. Lawmakers might decide to repeal such provisions to help lower the corporate rate in a revenue-neutral manner.
  • Lawmakers may not be willing to forgo certain incentives or favorable rules. The list of tax expenditures includes tax credits, such as the orphan-drug credit. Lawmakers may want to keep such provisions. It is relevant to note that several credits have no revenue estimate because they expire before 2012, such as the research tax credit and work opportunity tax credit (WOTC).
  • Removal of some tax expenditures may harm global competition for U.S. firms. For example, slower depreciation methods and longer lives are unlikely to be competitive with depreciation systems used in other industrialized countries. Similarly, many countries, including those with lower corporate-tax rates, have incentives for R&D expenditures.
  • Repeal of some tax expenditures may make the law more complicated. For example, expensing of research and experimental expenditure (Section 174) provides an incentive to engage in R&D work. It also simplifies the law by removing the need to determine the amortizable life and method for such expenditures.
  • Are the revenue estimates realistic? Many of the tax expenditures represent timing differences. For example, repeal of Modified Accelerated Cost Recovery System (MACRS) rules and applying slower methods and longer lives represent timing differences. In addition, this is the largest revenue raiser in the list at almost $507 billion over 10 years (just for C corporations). Also, the JCT observes that due to the effects of timing items in the list, a 28-percent rate might only be revenue neutral in a 10-year time period. A longer projection period would likely result in a higher tax rate for revenue neutrality.

Additional Considerations

No doubt, finding roughly $71 billion dollars annually to support a 28 percent corporate tax rate will be challenging and some may want to see an even lower rate or a low rate with special incentives, such as for depreciation and R&D (requiring more revenue offsets). With the numerous changes needed for revenue neutral reform, consideration should also be given to more significant reform, such as some form of consumption tax in place of the corporate income tax. For example, in a 2007 report, Treasury described a business activity tax (BAT), a type of consumption tax, to replace the income tax for all forms of business (see reference list below). The 2005 final report of President Bush's Advisory Panel on Federal Tax Reform included a proposal for a Growth and Investment Tax Plan, with some consumption tax elements.

Another consideration is that over 140 countries use a value-added tax (VAT) at the national level. Perhaps the presence of a VAT, in addition to the income tax, enables these countries to have a lower corporate tax rate.

Looking Forward

The JCT report, although still preliminary and in need of more data, is a welcome addition to today's tax reform discussion. It will help identify appropriate changes to enable a revenue-neutral change. The discussions generated will also likely include important issues of whether all businesses should be taxed the same, how international tax reform ties in, what other changes are needed for U.S. businesses to be competitive in the global marketplace and how principles of good tax policy, such as simplicity, neutrality and equity, can be met in a reformed federal tax system.


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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the AICPA, ABA and California State Bar. She chairs the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.