Obama Proposed Corporate Tax Reform – Cut Tax Rate But Seal Up Loopholes

It’s yet another example of something that most lawmakers agree on yet it most likely will not get done.  Washington gridlock is alive and well even when there is no disagreement on the core issue.

That is the main problem with the corporate tax.

Currently, American corporations pay a 35% tax rate, higher than any other advanced country and most lawmakers, tax experts and, of course, corporate CEOs believe that this is too high.

Because of that, President Obama proposed lowering the tax rate to 28% in an attempt to make America a more corporate friendly place to do business.

The chances of this issue gaining enough traction to get through Congress is essentially none.

Here’s why.

Paper Vs. Reality

Although the corporate tax rate is 35% on paper, the complicated system of deductions and credits make the realistic rate that most companies pay somewhere around 18% with many corporations paying even less than that.

Although Obama wants to lower the tax rate to 28%, he also wants to do away with many of the deductions and credits making the tax rate, in reality, higher for many businesses.  He also wants to impose a minimum tax on money earned outside of the United States effectively ending a loophole that allows corporations to keep foreign earnings off of American soil.

Tax experts believe that getting rid of the loopholes, exemptions, and deductions wouldn’t cost companies as much as they might think.

Because they spend a lot of time and incur a lot of expense trying to plan for and navigate the complicated tax code, removing the complications would also eliminate much of expense.  Companies could easily plan for the tax liability and set prices accordingly, but that doesn’t have everybody convinced.

Elections

corporate tax reform
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What do you think of the President’s proposed corporate tax reform?

The largest of the uphill battles may be the fact that it’s an election year.

Politicians know that taking on the corporate tax rate also involves taking on a large contingent of corporate lobbyists, which have traditionally caused lawmakers to quickly back down from those plans.  The pressure will be even higher in an election year, something that the Obama Administration may be counting on as they propose common sense style reform design to get the attention of voters.

Manufacturing

One piece of the proposed legislation that is getting a lot of criticism is the even lower rate for manufacturing companies.

In an attempt to keep jobs in America, Obama wants to have an even lower rate for companies like Boeing that manufacture products in America.  Opponents of this piece of the legislation argue that companies like Boeing already pay next to no corporate tax so lowering their rate won’t change anything.  Some believe that it would be better if their tax rates went up.

The main problem, according to some, is that lowering the tax for manufacturers is much like picking a winner among corporations.

Finally

Most insiders give the corporate tax legislation little to no chance of making it through Congress but the fact that the administration acknowledged that the corporate rate is too high and the tax code too complicated is a step towards real reform…just not this year.

What do you think of Obama’s proposed corporate tax reform?  What do you think would work?

sources:
Obama Unveils Proposal to Cut Corporate Tax Rate – NY Times
Corporate Tax Rates Effectively Already Below Obama’s Proposed Level – Huffington Post
Obama’s Corporate Tax Cut Plan Faces Uphill Battle – NPR

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Published or updated April 16, 2013.

Comments

  1. Julie @ Freedom 48 says:

    I think it’ll be a good change. Many corporations know the ins and outs of tax write-offs and can manipulate the books to use that to their advantage. Too many times I hear about corporations “writing off” things that were not in fact legitimate business expenses. So long as they have a receipt for it, it seems to be acceptable.

  2. Not enough. U.S. companies moved overseas because they can get 15-20% elsewhere. Anyone who watches 60 Mins knows this much. We’ve got to get our corporate rate way down.

    His budget also bumps the dividend tax up above 35%. It’s a budget plan that’s DOA. So much so that Mitch McConnell (R) says he’ll introduce it in the House, because he’s 100% confident it won’t pass. This budget only includes certain things so he can say on the campaign trail that he included them. A waste of everyone’s time.

  3. Like most of changes in Washington, everything is in the details. There will be a lot of unintended consequences. Closing some loopholes will open up others. I have little faith in the system that will actually improve things Republican or Democrat.

  4. harvestwages says:

    I just don’t think any of these changes will do any help in the economy

  5. I do like the idea of lowering the corporate tax rate, but I agree with Philip in thinking this proposed change is grossly insufficient. Ideally, I would like to see corporate tax removed altogether.

    Probably most companies that are able to take advantage of “loopholes” and pay very low tax rates are big multi-nationals (because they do business in other countries). Small and medium businesses probably can’t utilize the same advantages, so they end up paying higher tax rates. Thus, I would think lowering the tax rate would generally be more equitable to small and medium businesses. I can support that.

    To take a few steps back, however, we shouldn’t even have a corporate tax. It’s sort of “smoke and mirrors”, since we the consumers are the ones paying the tax anyway as part of the price of goods/services. Tax is an added expense, so companies raise prices to cover it. Whether collected directly in our personal taxes or indirectly from corporations, we’re the ones paying it. When collected indirectly through corporate tax, it doesn’t *feel* like we’re paying it, so it’s a handy political tool. A major downside, of course, is that corporate tax requires additional overhead of lawyers and accountants, which we also pay for. I’ve seen estimates upward of $400 Billion of cumulative annual cost just to comply with tax laws. What a waste!

    While this does employ more lawyers and accountants, those jobs are a drain on the economy since they add nothing of value. Imagine the rise in national production if 1) we didn’t have to waste money to pay for them, and 2) they themselves worked in productive jobs. With reduced costs, companies’ growth would be less hindered, and prices could fall a bit. Additionally, without corporate tax, there would much more incentive for foreign companies to do more business in the U.S., since we would be a tax haven. (Same reason U.S. companies flock toward foreign countries.) Don’t just slow the losing of jobs here; bring new ones here from elsewhere. :-)

    • Those are some interesting points!

    • You make some good points, Wiseguy. It should be noted that the costs of the corporate tax are shifted not only to consumers, but to the labor force as well. Aside from the cost to consumers, the CBO (the non-partisan Congressional Budget Office) found that “domestic owners of capital can escape most of the corporate income tax burden when capital is reallocated abroad in response to the tax” and that “domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital bear slightly more than 30 percent of the burden.” Lowering the corporate tax rate is one of those issues that should enjoy bipartisan support for many reasons. The current high tax rate just promotes too much cost-shifting, and ultimately provides a large barrier for domestic investment.

      http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/75xx/doc7503/2006-09.pdf

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