Obama’s Corporate Tax Reform

President Obama released a document on business tax reform today. I’m glad the administration is taking an interest in this important topic, but his plan has more negatives than positives. The administration’s tax reform approach is also self-contradictory in numerous ways. Here’s a quick take:

  • The proposal would lower the federal corporate tax rate from 35 percent to 28 percent. That’s a small step in the right direction, but with state-level taxes included the U.S. rate would still be about 33 percent. By contrast, the average rate among OECD countries is just 25 percent.
  • Studies by Jack Mintz show substantially different marginal effective tax rates than does the new administration study. For 2010, Mintz found that the U.S. rate was 34.6 percent, which was much higher than the average OECD rate of just 18.6 percent.
  • The administration rails against tax loopholes, but it proposes a whole slew of new ones in its recent budget.
  • Most of the “loopholes” the administration does go after are not real loopholes at all, such as accelerated depreciation.
  • The administration’s proposals would further penalize the foreign operations of U.S. companies. Most high-income nations have gone in the reverse direction and adopted territorial corporate tax systems. See Global Tax Revolution.
  • The administration’s study describes the problems caused by double taxing corporate equity, but its own proposal to hike the top individual dividend tax rate to 40 percent would make the problem much worse.
  • The administration’s plan would be a revenue raiser. As such, it won’t go anywhere on Capitol Hill. Indeed, I doubt whether a revenue-neutral corporate tax plan (if scored statically) would pass Congress. Instead, policymakers should focus on either a pure rate cut or matching a rate cut with cuts to business subsidies and other wasterful spending.