White House Now Targeting Corporate Taxes

The White House’s intent to increase taxes on investment income, transmitted in the recently released President’s Budget Request, has been identified as a threat to a still recovering American economy. However, it seems now that corporate tax reform may pose risks as well. The corporate tax reform plan released this week by President Obama and soon to be former Treasury Secretary Geithner uses the bipartisan concept of broadening the base and lowering the rate to mask a large increase in revenue destined to foot the bill on unreformed spending and the White House’s shift towards mercantilism going into the election. Details of the plan are fairly straightforward, however the ramifications of some of the strange proposals made in the plan are continuing to be analyzed. Here is a rundown of some others' recent thoughts on the plan’s shortcomings.

Global Competitiveness

The Obama-Geithner plan would lower the statutory corporate tax rate to 28 percent from 35 percent, currently the second-highest among advanced economies. But that would still leave the combined U.S. corporate tax rate—state and federal—at 32.2 percent, far above the OECD combined average of 25 percent. The U.S. combined rate would be a bit below slow-growing Japan and France but above the U.K. and Germany. That’s not nearly good enough. Canada just lowered its corporate tax rate, for instance, to 15 percent. So instead of having the second highest corporate tax rate in the world, the United States would probably be fourth behind Japan, France, and Belgium.

-- from James Pethokoukis on AEI’s The Enterprise Blog

Cognitive Dissonance

Also, it is ironic that Obama is proposing a 20 percent tax cut for corporations just weeks after proposing a "Buffett rule" for high-income individual taxpayers, many of whom are pass-through businesses such as S-corporations and LLCs. Interestingly, the top corporate tax rate and the top individual tax rate are at the same level - 35 percent - for the first time in the history of the U.S. tax system. I thank [sic] that parity should be maintained, but under Obama policies we would have a 28 percent corporate tax rate and a top individual of at least 39.6 percent. Thus you would see an exodus of S-corporations flipping to C-corp status.

-- from Scott Hodge on the Tax Foundation’s Tax Policy Blog

Global Minimum Tax

Our current system of international taxation allows firms to be competitive in the global economy by enabling them to defer taxation on foreign profits, until those profits are repatriated to the U.S. parent. As a result, firms can pay taxes at the same rate as other firms operating in that country. With the imposition of the minimum foreign tax, we will end up imposing higher tax rates on U.S. multinationals operating abroad relative to their foreign counterparts, and make them less competitive. This would negatively impact their profitability.

-- from Arpana Mathur on AEI’s The Enterprise Blog

Picking Winners, Choosing Losers

But then the plan ignores that advice and picks winners and losers. It offers a sweetheart 25% rate for certain manufacturers and even lower for "advanced manufacturing," which would invite a lobbying free-for-all in Congress. Meanwhile, the plan punishes those the White House doesn't like, such as companies in oil and gas or with operations abroad.

The oil and gas industry has led manufacturers in job creation for four years and already pays at or near the highest effective federal tax rate of any industry. Yet the President's tax plan raises its taxes but retains (as best we can tell) the credits and other giveaways to his supporters in green energy.

-- from the WSJ Review of Obama Tax Reform