Evaluating Obama's Proposed Corporate Tax Cut

Wednesday, February 22, 2012 - 08:01 AM

The Obama administration proposed an overhaul of the corporate tax code. He wants to cut the top corporate rate down to 28% in exchange for closing loopholes.

Today businesses have their profits taxed at 35% on the federal level. Businesses like to complain that this rate is very high when compared to other nations. Republicans argue this high rate drives business overseas. There is probably some merit to this argument. (Remember the CBS "60 Minutes" episode on the hundreds of billions of dollars of profits that are held off-shore accounts in Europe that businesses can’t bring back into the U.S. because it would expose all the money to tax? This is a result of businesses attempting to avoid the corporate tax. Of course, it is a lot more complicated than that. Namely, the personal income tax in the U.S. is relatively low compared to other nations — meaning the government collects taxes at the business level while leaving individuals alone. In Europe, it is the reverse. Businesses pay lower rates, but individuals pay higher income taxes.)

 

President Obama and the administration are proposing a “reduction” in the corporate rate. This means the tax rate for any public company would go down to 28% from 35%. To further incentive manufacturing jobs to be housed in America, the administration is proposing that businesses who manufacture goods be taxed at only 25%.

 

But, there is no such thing as a free lunch (and the government will need to figure out how to get back the funds it will lose by cutting the rates). In exchange for lowering these rates, the administration is advocating getting rid of loopholes and subsidies (i.e. deductions) that many businesses use to limit their tax exposure. Businesses, of course, are opposed to any such reductions/eliminations. The New York Times suggests there will be a major lobbying battle where businesses will try to protect the subsidies they have fought for over the years. Some industries will “win” and others will “lose.” It is likely that many energy subsidies will be eliminated because that industry is also substantially vilified and they have been making money hand over fist for a while now. There is no reason the government should be subsidizing their existence. At least, that is what the Democrats will say. Those on the other side, Grover Norquist for example, argue that the elimination of a subsidy or tax break is the same thing as voting for a tax increase. So many Republicans will not support the elimination of the breaks.

 

Many Democrats will further argue, corporations have recovered a lot faster than the American people and they do not deserve any tax breaks.

 

Why is this proposal a good thing? First, the hope is that the tax code becomes more simplified. So much money is already spent on accountants and lawyers to prepare returns every year. If the code was simpler, businesses would not have these expenses. Plus, a simpler code would reduce the government’s enforcement costs too. Second, it serves to level the playing field. All industries would be taxed the same, or put another way, some industries would no longer receive preferential treatment from the government at the expense of other industries.

 

Is it likely to pass? Hard to say. As mentioned above, both parties will face pressure from their base about certain parts that they don’t like. I would say it is more likely to pass than not — probably during a lame duck session in December. The tax code will always be screwed up. Anything done on this front will be a step in the right direction, but will probably be perverted in a couple of years ... or sooner.

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