Headlines over the past couple of weeks have been dominated by reactions to President Obama’s new proposal for corporate tax reform. The optimism stems from the realization that practically all the major plans by Democrats and Republicans would move the U.S. tax code in the direction of a territorial-based system (in which a corporation is taxed on domestic, not foreign, income). Moreover, these plans all accept the premise that to make the U.S. code more competitive globally, the tax base must be broadened, and that means cutting deductions and preferences in exchange for lowering the top-line rate (i.e., down to between 25 percent and 28 percent from today’s 35 percent rate).

Even with this apparent consensus, however, it seems inevitable that actual reform will not occur until 2013. Perhaps more important, the way these issues play out in the coming months could very well shift the reform discussion from how to tax income to how to tax consumption for both individuals and corporations. Here are three developments to watch.

The politics require more “tax winners.” To get the corporate tax rate down to the new target range, Congress might have to cut both accelerated depreciation and the expensing of research and development. The difficult truth is that any revenue-neutral tax reform proposal would likely create as many (and maybe even more) losers than winners. In essence, a rate reduction to 28 percent might help a few industries, but slashing the deductions for capital spending or investment could end up raising the effective tax rate for even more companies.  The net effect could be a slightly smaller economy relative to its full potential, as new investment and the growth of the available capital stock could be restrained. In an effort to broaden the coalition and create more winners, Congress will probably have to consider cutting the top rate even further, then redefining what’s actually counted as corporate income.

The window is closing for piecemeal tax reform. The politics of trying to get a “win” by tackling just the corporate side of the code will fade — once again — as everyone begins to realize just how intertwined the individual tax system is with its corporate counterpart. The government’s share of corporate revenues comes from dollars that would have otherwise gone to one of the following: shareholders, management, suppliers, employees or customers. This Econ 101 point is perhaps best reflected by Greg Mankiw’s argument that “a corporation is not really a taxpayer at all. It is more like a tax collector.” The implication is that the individual tax code is fundamentally linked to the corporate side, especially if one prioritizes economic growth and the design of an efficient tax collection regime. After all, corporate tax revenue is only the third-largest source for the federal government (around 2 percent of GDP), behind the individual income tax (roughly 8 percent of GDP) and the payroll tax (which was about 6.5 percent back in 2006, before the crisis and the temporary rate cuts that were subsequently used for stimulus). A related point is that since the last tax overhaul in 1986, there has been a tremendous increase in the utilization of pass-through entities (i.e., LLCs and partnerships). Today, the U.S. has one of the world’s largest non-corporate sectors, with pass-through entities in recent years accounting for around 40 percent of total business net income.

Taxing savings and investment. The 2012 election is shaping up to mirror many aspects of the tax debate from 2003-2004. In 2003, President Bush advocated making dividends tax exempt if they were paid out of income that had already been taxed once at the corporate level. The law Congress ultimately passed brought the dividend rate down to 15 percent (the same rate as for capital gains). With personal tax rates on both forms of after-tax corporate income set at the same rate, a company could prioritize its business plan over tax management when deciding whether to retain or reinvest profits, distribute money as dividends, or pursue a stock buy-back. The arguments in favor of lower tax rates on capital generally follow the logic that the double (or higher) tax ends up distorting various investment- or savings-related decisions. From an economic-efficiency perspective, individuals and businesses should be encouraged to build resources and then be left to make the decision on their own whether to deploy their capital so as to maximize productivity and wage growth. Under the current tax regime, the government effectively has its foot on the scale by providing preferences for certain industries and biasing an investor’s decision-making process. (See an op-ed by Greg Mankiw for more.) The counterarguments are usually focused on issues of fairness. Critics are right to point out that the rich (and middle class) are initially the largest beneficiaries of low taxes on investment and savings, but this is because generally the poor don’t own equities that can appreciate or issue dividends. In part at least, this is why the 2004 Democratic nominee, Sen. John Kerry, decided to run on a platform that included repeal of the lower tax rate for dividends.