Tax reform: You don't care, and neither does DC

Does Congress have the guts to reform tax code?
Does Congress have the guts to reform tax code?

With new corporate tax inversion deals seeming to be announced every week, observers of politics and business wonder: Why hasn't Washington reformed corporate taxation?

There are many reasons, but the most important one is simple. No one wants it badly enoughnot Democrats, not Republicans, not the business community, not ordinary voters.

The size of the problem suggests it shouldn't be so hard to solve. Corporate taxes represent only about 10 percent of the federal government's revenue stream. Personal income taxes generate five times that much money.

At the same time, the divergence between U.S. policy and those of competitors is clear. America's top corporate tax rate is 35 percent. That compares with 25 percent for China and Japan, 23 percent for the United Kingdom and 15 percent for Germany and Canada.

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But so far at least, motivation to change it remains weak everywhere you lookdespite the business news headlines.

President Barack Obama and Democratic leaders in Congress would be willing to accept a corporate tax reform that would accelerate economic growth. But they would only do so if rates cuts were offset by loophole-closings large enough to ensure the new system raises at least as much revenue as the old one. A rate cut for its own sake isn't a priority. The Obama Treasury Department initiated consultations about "revenue-neutral" corporate tax reform in 2011, but trench warfare over the budget and debt limit that year ensured it never achieved liftoff.

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Republican leaders do want to cut corporate rates. But they also want to cut personal rates as part of a reform of the entire system. For practical and political reasons, they insist on doing both at the same time. But comprehensive reform is a nonstarter because Democrats insist that a reformed overall system raise more revenue, and Republicans say no.

House Ways and Means Chairman Dave Camp, R-Mich., recently proposed a comprehensive personal and corporate tax reform plan designed not to cost the federal government any money. But fellow Republicans considered it so controversial that they haven't even held a committee vote.

Why controversial for the party of job creators? Because tax reform generates corporate losers as well as winners, which leaves the business lobby weak and divided, hobbling the push for reform.

For example, Wall Street (32.5 percent) and biotech firms (37.6 percent) currently pay relatively high effective tax rates because they benefit from fewer deductions under the current system. They'd be big winners from reform. For politicians burned by having supported bailouts for the financial system in 2008, cutting taxes for Wall Street firms is not an attractive proposition.

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Because of loopholes available to them, industries such as construction (20.4 percent) and auto parts (13.6 percent) currently pay low effective tax rates. They'd be big losers. The National Association of Manufacturers, whose members benefit from a large tax credit for domestic manufacturing, has vowed to fight any move to take it away in order to lower overall rates.

Given their own economic struggles, ordinary American have little interest in cutting rates for corporations. They think Big Business already pays too little through elaborate tax avoidance arrangements. The broader electorate is not a source of political pressure on this issue.

In today's polarized Washington, even once-simple political feats like passing budgets or extending financing for existing highway projects are difficult to achieve. Would-be tax reformers, like advocates of new immigration system, face a much steeper climb.

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That doesn't mean a new round of tax reformthe last one was enacted in 1986 under Ronald Reaganwon't happen eventually. That will come when Washington concludes it's an economic imperative and the political stars align just so. But there's no sign of that in mid-summer 2014.

—By CNBC's John Harwood