Is the Corporate Tax System "Broken"‪?‬

I. INTRODUCTION The slated expiration of the Bush Administration's tax cuts in 2010 highlights the instability of the current 15% rate on dividends and capital gains. Meanwhile, pressure has mounted to reduce U.S. corporate tax rates to improve competitiveness in an increasingly global economy. Much of the 1986 Act reform of the corporate tax--base-broadening combined with lower rates--has unraveled, leaving the United States with a high statutory corporate tax rate and narrow corporate tax base. (1) Despite renewed interest in base-broadening and loophole-closing, the goal of corporate tax reform remains elusive. On one hand, the Administration appears to favor increased expensing of investment as an incremental step toward fundamental tax reform. (2) On the other hand, current legislative proposals would broaden the corporate tax base and reduce the maximum corporate tax rate. (3) Thus far, proponents of corporate tax reform have largely sidestepped the controversial issue of whether the 2003 tax cuts on dividends and capital gains should be made permanent. Given the importance of the relationship between the maximum individual and corporate tax rates, the issue of corporate tax reform cannot be divorced from the issue of whether to extend the 2003 tax cuts and the accompanying revenue and distributional concerns.