Senator McCain's Corporate Tax Proposals: A Critical Examination

By Reuven S. Avi-Yonah | April 14, 2008

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Senator John McCain (R-AZ) has proposed two major changes to the corporate tax code: cutting the corporate tax rate from 35 percent to 25 percent and allowing corporations to deduct the full cost of investments in technology and equipment in the first year, an accounting process known as expensing. The first proposal aims to enhance U.S. economic competitiveness, create jobs, and increase wages. The second proposal aims in particular to boost capital expenditures and “reward investment in cutting-edge technologies.”

Both measures, if enacted by Congress, would greatly alter the role of corporate revenues in our tax system. Corporate taxes account for a significant share of the federal government’s revenues (about 14 percent in 2007), financing critical investments in national defense, infrastructure, and human services. The corporate tax is crucial for the overall progressivity of the tax system, prevents individuals from sheltering income in corporations, and enables some measure of regulatory control over corporations.

There are major problems with the corporate tax code, of course, such as the provisions that encourage U.S. companies to locate jobs overseas. Reforms of the tax code to address these problems—including proposals that would close loopholes and lower the corporate tax rate—are worthy of serious consideration. Some changes, however, would make these problems worse.

This paper examines Sen. McCain’s corporate tax proposals on tax sheltering, growth and competitiveness, equity, and cost. In each case this proposal raises significant concerns. Specifically:

• Allowing corporations to expense their investments in new equipment and technology, in the context of the current tax code, invites massive tax sheltering.
• Cutting the corporate tax rate to 25 percent from 35 percent would also drain the ƒƒfederal treasury, without improving the competitiveness of the United States as a place to do business or of its corporations in the global marketplace.
• Reducing the corporate rate will overwhelmingly benefit upper-income taxpayers. ƒƒ
• Combining rate cuts and expensing would be enormously expensive, reducing corporate revenues by as much as 75 percent.

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