A radical tax plan the left and right can agree onAugust 29, 2012: 5:00 AM ET
The President, key conservatives, and even some of the nation's biggest corporations are leaning toward trading special breaks for lower rates.
By Nina Easton, senior editor-at-large
FORTUNE -- The economy coughs and sputters and threatens to stall out -- again. Growth slows; unemployment ticks back up to 8.3%. Congress shamelessly convenes a five-week recess, while the President camps out under the comforting applause of the campaign trail.
The absurdity of Washington's inaction comes into fuller relief when you realize that there actually is something lawmakers could do to stimulate economic growth, boost America's international competitive position, and improve living standards. Something that (believe it or not) draws bipartisan support even in these hyperdivided times.
But corporate tax reform -- dramatically lowering the rate while closing loopholes -- would require a holy alliance of courageous party leaders willing to buck K Street's lobbyist juggernaut, and strategic business leaders willing to buck short-term corporate interests. (For more on tax reform see our election package.) Both are in short supply, but far from absent. In fact, the ground for post-election reform is already being laid.
At 35%, the U.S. corporate tax rate is among the highest in the world and competitively out of step with other countries, like Canada, that are lowering theirs. But the idea behind reform is not to reduce the overall tax burden on corporate America. Tax avoidance is a skill so valued by management that more than half of American corporations no longer pay significant taxes anyway, according to the General Accountability Office.
Rather, reform will attract (taxable) capital investment -- and thereby jobs at better wages -- here at home. In the past decade 46 corporate headquarters have left the U.S., and trillions of dollars in profits remain offshore. As finance professor Mihir A. Desai writes in this summer's Harvard Business Review, "High corporate taxes divert capital away from the U.S. corporate sector and toward noncorporate uses and other countries. They therefore limit investments that would raise the productivity of American workers and would increase real wages. This is the cruel logic of a corporate tax in a global economy -- that its burden falls most heavily on workers."
A number of studies have found that reducing the corporate tax rate to, say, 25% would add one to two points to America's GDP growth. And this is a rare tax cut (unlike individual rates) that even President Obama claims to support, along with Republican tax activist Grover Norquist and some of corporate America's biggest names. The President is on record supporting a lower rate combined with killing "unfair" tax breaks. The administration shows no signs of leading the charge, but its rhetoric suggests the White House won't stand in the way either.
Norquist is key because his tax pledge -- a signed promise not to raise taxes -- could make it politically untenable for Republican lawmakers to eliminate corporate tax breaks, even as they lower the overall rate. But Norquist tells Fortune he's ready to play ball: "Revenue-neutral tax reform, as [enacted] in 1986, is fine. It is perfectly consistent with the Taxpayer Protection Pledge."
Finally, there is a coalition of businesses with large American workforces, called RATE, committed to reform. The group -- made up of firms like Boeing (BA), FedEx (FDX), AT&T (T), and Ford (F) -- has been quietly trying to convince lawmakers that its members will sacrifice their tax breaks for a lower rate. "Elected officials need to hear our tax VPs say, 'We will put expenditures on the table,'" says veteran Democratic strategist Elaine Kamarck, who co-chairs the bipartisan group. "This is what breaks the whole thing loose."
Yes, this battle could be a bloodbath -- with manufacturers and energy concerns defending valuable tax breaks, or, under Desai's plan, noncorporate entities like limited partnerships objecting to a new tax.
But it's a battle worth waging. The 1986 reforms came after a fierce legislative brawl and have been credited with encouraging a decade of growth. Politically, too, it's worth noting that the biggest loser in any reform would be Washington's entrenched tax lobby. And that's something this unpopular Congress could take to the bank with voters.
This story is from the September 3, 2012 issue of Fortune.