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White House Corporate Tax Plan Leaves Much To Be Desired

Earlier today the Treasury Department unveiled a plan to reform corporate taxes that’s not likely to go anywhere, at least not this year:

WASHINGTON — President Obama asked Congress on Wednesday to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent.

Mr. Obama’s proposal, being outlined by Treasury Secretary Timothy F. Geithner at a midday briefing, also would establish a minimum tax on multinational corporations’ foreign earnings, to discourage “accounting games to shift profits abroad” or actual relocation of production overseas, a senior official said before the briefing.

With this framework for changes, Mr. Obama will enter an election-year debate with Republicans in Congress and in the presidential race who seek even lower taxes for businesses, as well as lower individual tax rates than Mr. Obama has embraced.

(…)

The administration plan to revamp a corporate code that is widely derided as inefficient and anticompetitive has been in the works at Treasury for two years, and is a priority of Mr. Geithner. Yet he has been preoccupied with crisis management, and is unlikely to see the project through since he plans to leave office after this year.

“The current tax code was written for a different economy in a different era,” Mr. Geitner said, citing such changes as the Internet revolution, cellphones, the rise of China and other emerging markets and a global trend to lower corporate rates. “It needs to be reformed and modernized.”

Republicans and business groups complain that the 35 percent corporate tax rate is among the highest in the world, leaving American companies at a competitive disadvantage. They typically seek a 25 percent rate, with many of them saying that the current tax breaks should be kept in place as well.

Earlier this year, Mr. Obama proposed to end tax breaks for companies that move jobs overseas and to create new breaks for those that bring jobs back.

Mr. Obama is proposing that the simplification of the corporate code should not add to the deficit, and that most or all revenue raised by closing tax breaks should be used to lower rates or offset the cost of new or existing tax breaks favoring manufacturing, clean energy, and research and development activities, according to administration officials.

For tax purposes, however, the administration would face a challenge in defining manufacturing to determine which companies would benefit from a lower rate.

While details were sketchy, an official said Mr. Obama’s tax framework would “refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.”

For multinational corporations, officials say the administration will oppose any shift to a territorial system of taxing offshore profits, which could exempt most of corporations’ foreign earnings from American income taxes.

The Cato Institute’s Dan Mitchell notes that there are some good elements in the President’s plan, but that on the whole it amounts to little more than rearranging the deck chairs on the Titanic:

Let’s look at President Obama’s planfor corporate tax reform.

  • The good news is that he reduces the tax rate on companies from 35 percent to 28 percent (still more than 32 percent when state corporate taxes are added to the mix).
  • The bad news is that he exacerbates the tax burden on new investment and increases the second layer of taxation imposed on American companies competing for market share overseas.

In other words, to paraphrase the Bible, the President giveth and the President taketh away.

This doesn’t mean the proposal would be a step in the wrong direction. There are some loopholes, properly understood, that are scaled back.

But when you add up all the pieces, it is largely a kiss-your-sister package. Some companies would come out ahead and others would lose.

Unfortunately, that’s not enough to measurably improve incomes for American workers. In a competitive global economy, where even Europe’s welfare states recognize reality and have lowered their corporate tax rates, on average, to 23 percent, the President’s proposal at best is a tiny step in the right direction.

James Pethokoukis is far less charitable, calling the plan a total bust:

Real pro-growth corporate tax policy would eliminate tax breaks, dramatically lower tax rates, and only tax profits earned at home. The Obama plan would actually make the corporate tax code and the U.S. economy less competitive and less productive. But the proposal does neatly fit into the president’s Occupy-inspired campaign theme that wealthy Americans and greedy corporations are to blame for the Great Recession and rising income inequality. Besides, how can Democrats ever raise taxes on the middle-class to pay for all their spending ideas without first socking it to the 1 percent and to business?

Instead of doing as Pethokoukis recommends, though, the Administration is putting forward a plan that replaces a corporate tax plan with one set of loopholes with a slightly lower corporate tax with a completely different set of loopholes. As The Washington Post notes in it’s wrap up of the plan, “Obama will target oil and gas companies for tax hikes while promising special breaks for manufacturing companies.” Now, this isn’t to defend the tax breaks for oil and gas companies; as I’ve said several times before, I think those should be eliminated just as the Obama plan suggests. However, replacing tax loopholes for one set of favored industries with a different set of tax loopholes for different favored industries doesn’t really constitute rational tax reform at all, it merely shifts the tax burden from one segment of industry to another.

More important, though, is the point that Mitchell makes. If the United States is going to boost its economy, we’re going to have to find a way to attract more businesses to American shores. One way to do that is through the corporate tax code. If we’ve got a higher tax burden than Europe, and we will even if this plan were adopted, then what exactly have we accomplished here? Nothing of substance, it would seem. The better alternative would be to eliminate the corporate loopholes and lower the rate to the point where it’s actually more competitive with the rest of the world. In the end, the result would be higher tax revenues as the new rates attract businesses from overseas eager to take advantage of the lower tax rates and the other advantages that doing business here in the U.S.  As Dan Mitchell put it, the President’s plan is a step in the right direction but it’s a very, very small one that wouldn’t accomplish much of anything.

Of course, it’s worth realizing that this tax plan isn’t going anywhere. Not only is it unlikely that Republicans in Congress are going to be all that sympathetic to the ideas that Secretary Geithner put forward today, largely for the reasons that Pethokoukis notes in his detailed post, but the simply fact of the matter is that tax reform like this just isn’t going to happen in an election year. Consider it, perhaps, an opening bid, or more likely a campaign plank. Just don’t bet on this plan ever being taken up by either House of Congress any time between now and the election.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Brummagem Joe says:

    However, replacing tax loopholes for one set of favored industries with a different set of tax loopholes for different favored industries doesn’t really constitute rational tax reform at all, it merely shifts the tax burden from one segment of industry to another.

    This is true but it comes down to whether you think tax policy should encourage making diesel engines in Illinois or reward enormously profitable oil companies for not doing much of anything to expand the domestic economy. The breaks the oil companies get are for activities that are largely fictional whereas if Cat opened a new engine plant somewhere the benefit is both considerable and tangible.

    Like or Dislike: Thumb up 4 Thumb down 0

  2. Brummagem Joe says:

    Btw Cato and Pethokoukis have zero cred as objective commentators on anythng out of the Obama admin. There’s no doubt an element of election year positioning going on here but at least the conversation has been opened and if history is any guide I’m sure the GOP will invest enormous effort in defending the tax breaks of their traditional allies. Whether this is wise remains to be seen.

    Like or Dislike: Thumb up 6 Thumb down 1

  3. Vast Variety says:

    The current system of loopholes, allowance for moving funds and manufacturing off-shore, and system of corporate welfare makes American companies generally have less of a tax burden than their overseas equivalents and the system hasn’t encouraged job growth here yet. So I trouble understanding how lowering taxes even further is supposed to encourage job growth.

    Lower taxes on corporations doesn’t encourage job growth. It only encourages hording.

    Like or Dislike: Thumb up 8 Thumb down 0

  4. Hey Norm says:

    James Pethokoukis of the uber-right wing American Enterprise Institute and the Weakly Standard, and supporter of Paul Ryan’s Tea Party Manifesto, thinks Obama’s plan is a bust.
    I heaven’t seen many details but based on that endorsement I would have to think it’s a pretty good plan.
    According to Pethokoukis Obama:

    “…has the temerity to propose a corporate tax reform plan that would actually raise the tax burden on American business by $250 billion over a decade (and de facto on workers, too) without lowering rates to an internationally competitive level…”

    Wow…$250B over 10 years? How ever will corporate America survive? Of course you also can’t cut Pentagon spending by $487B over the next decade. I guess the only solution is to raise taxes on the sick and the poor and the elderly, and eliminate any kind of social safety net.
    As for an internationally competitive level…America is already an extremely low tax nation. We would have to raise taxes considerably to be competitive.
    And therein lies the trouble. You can’t even have a discussion with the so-called right because they refuse to deal with the real world.

    Like or Dislike: Thumb up 12 Thumb down 0

  5. Rob in CT says:

    If I had drafted the proposal, I might have gone bigger. I probably would have lowered the rate a good deal more and ripped out all the deductions (or as many as I possibly could). Hell, I’m almost convinced that the best policy is to remove corporate taxation entirely, coupled with a complete overhaul of the tax system (including removing/reducing via phaseout most deductions, increasing # of marginal rates, increasing progressivity overall, taxing inflation-adjusted capital gains as normal income, etc). But that’s pretty easy for me to say, innit?

    It seems that Obama is looking to tinker – get rid of some deductions, but put in some new ones. And lower the rate.

    In which case the devil is very much in the details. I might end up being pro, I might end up being con. In all likelyhood, I won’t be vehemently so either way.

    Like or Dislike: Thumb up 0 Thumb down 0

  6. Anderson says:

    What did Dubya and his Republican Congress do about this supposedly oh-so-obvious issue?

    If Mataconis is just going to be a mouthpiece for Cato etc., then probably we should read them, not OTB.

    Like or Dislike: Thumb up 5 Thumb down 1

  7. @Anderson:

    You are mistaking me for an apologist for the Bush Administration. That’s never been the case.

    Like or Dislike: Thumb up 2 Thumb down 2

  8. Ben Wolf says:

    @Doug Mataconis

    You don’t think the most effective strategy would be to eliminate corporate taxes for businesses located in the U.S. and retain them for anyone producing outside it?

    Like or Dislike: Thumb up 0 Thumb down 1

  9. Ben,

    There are serious jurisdictional problems with taxing profits earned outside the United States for one thing. For another, if we start doing that then what’s to stop other countries from doing the same thing to foreign businesses who have set up shop in the United States (thus reducing the incentive for them to build plants here)?

    Like or Dislike: Thumb up 1 Thumb down 0

  10. Rob in CT says:

    We could discuss optimal policy, of course, even though we recognize that this particular proposal is not big “blue-sky” thinking and is quite possibly nothing more than a campaign plank (designed to get the GOP to scream and yell about the oppression of Exxon Mobil).

    The data I’ve seen indicates that the government’s take from corporate taxation has been dropping for decades (and is now ~1% of GDP), despite the 35% nominal rate.

    Because of the deductions and other rules, the effective rate is not 35%, or anything close IIRC. Given that, it is unclear whether the tax situation is better here or in other countries (all other things being equal) – I suspect it depends a great deal on what industry is involved.

    Like or Dislike: Thumb up 3 Thumb down 1

  11. Hey Norm says:

    @ Norm…
    In the past 3 years 30 of the nation’s largest corporations paid no federal income tax. That’s ZERO…nothing…zilch…nada. We are not talking about the sick or elderly or poor that don’t make enough to pay income taxes. We are talking about the largest corporations in the country. GE for christ’s sake. Less than 10% of US tax revenue currently comes from corporations…but historically the number has been closer to 30%. Corporate taxation is at historic lows…we have a large deficit…hmmm…what to do? The lack of demand holding back our economy is not due to corporate taxation. The so-called right keeps telling us low taxes are the key to growth…you can’t raise taxes on the “JOB CREATORS”. Where the fu** is that growth? This is basic f’ing math folks.

    Like or Dislike: Thumb up 5 Thumb down 0

  12. also would establish a minimum tax on multinational corporations’ foreign earnings

    US corporations are already at a big disadvantage internationally in that most countries tax domestic corporations in something closer to a “territorial” tax system rather than a “residency” based system like the US. This minimum tax idea would make it even worse by in many case double taxing foreign revenue.

    Like or Dislike: Thumb up 1 Thumb down 0

  13. Brummagem Joe says:

    AEI and Cato don’t want any corporate taxes so against this background they would say this wouldn’t they. The moving the deckchairs blather is simply a pejorative way of saying the overall tax burden on corporations will remain roughly the same but the burden will be shifted to encourage domestic manufacturing activity. If you accept that corporations should bear some part of the tax burden it makes entire sense to me but if you think corporations should be tax exempt then nothing is going to satisfy you is it?

    Like or Dislike: Thumb up 5 Thumb down 1

  14. Brummagem Joe says:

    @Stormy Dragon:

    US corporations are already at a big disadvantage internationally in that most countries tax domestic corporations in something closer to a “territorial” tax system rather than a “residency” based system like the US.

    Are you saying that US corporations pay a higher effective rate of taxes than their peers in Europe and Japan?

    Like or Dislike: Thumb up 1 Thumb down 1

  15. Tsar Nicholas says:

    A federal tax rate of zero on corporate earnings would be the best policy. The positive impacts on net job creation and macro growth would be a sight to behold. Obviously it’ll never happen, but we can dare to dream, can’t we?

    Like or Dislike: Thumb up 0 Thumb down 7

  16. Brummagem Joe says:

    @Rob in CT:

    the effective rate is not 35%, or anything close IIRC

    The effective rate is around 12 % the last time I looked although as several people have observed many major corporations pay little or nothing because they have lots of room to game the system with overseas operations and diversified businesses. The principal reason GE is paying little or no taxes is the deductions they can take for losses at GE capital. So in a way the taxpayer is again subsidizing financial malfeasance.

    Like or Dislike: Thumb up 4 Thumb down 0

  17. Brummagem Joe says:

    @Tsar Nicholas:

    The positive impacts on net job creation and macro growth would be a sight to behold.

    Yes all those repatriated profits under a tax holiday during the Bush admin were a huge source of job creation and domestic investment weren’t they. In fact most of it was given back to stockholders in special divs or share buybacks.

    Like or Dislike: Thumb up 8 Thumb down 0

  18. Gromitt Gunn says:

    The problem I see with a plan to lower rates and eliminate loopholes simultaneously that isn’t some sort of flat tax type of plan is that while the plan may be revenue neutral at first, but eventually Congress will start reinserting loopholes, thus reducing revenues.

    Like or Dislike: Thumb up 2 Thumb down 0

  19. Hey Norm says:

    “…The positive impacts on net job creation and macro growth would be a sight to behold…”

    That’s what we heard about the Bush Tax Cuts. Still waiting ten years later. When does it start?

    Like or Dislike: Thumb up 11 Thumb down 1

  20. @Brummagem Joe:

    What I’m saying is:
    1. Most other industrialized nations do not tax domestic companies for the income of foreign subsidiaries (usually with some exceptions for things like “mobile” income or tax havens). (e.g. Honda does not pay taxes on the total income of Honda USA, only on the dividends Honda USA pays back to the parent company).
    2. Most other industrialized nations provide a tax credit for taxes already paid in another jurisdiction.

    US companies are already at a disadvantage in terms of the US not doing #1. This proposal seems to put them at further disadvantage by not doing #2.

    Like or Dislike: Thumb up 1 Thumb down 0

  21. Brummagem Joe says:

    @Stormy Dragon:

    Most other industrialized nations do not tax domestic companies for the income of foreign subsidiaries

    I’m not an expert on this by any means but I believe that although technically this is true it’s something of a fiction. And US corporations only pay the tax when income is repatriated. Given who were talking here (Cat, GE, Merck et al) the entire repatriaation thing is a bit of fiction also. The people who really get disadvantaged in the present system are the straight up US domestic manufacturers with little or no overseas operations beyond distribution maybe. They don’t have the same room to game the system as a GE, Cat or Merck. I’m all for a big debate about how the system works because at the moment I can tell you personal experience it’s not really geared to favor domestic manufacturing.

    Like or Dislike: Thumb up 0 Thumb down 0

  22. Brummagem Joe says:

    @Stormy Dragon:

    Here’s an interesting discussion of the territoriality issue at the FT (unlike the kneejerk bs from Cato and AEI) although it does rather ignore the opportunities that $1.5 trillion of unrepatriated profits presents

    http://www.ft.com/intl/cms/s/0/8b2a06c2-5d6e-11e1-8bb6-00144feabdc0.html#axzz1n9Kn6b4R

    Like or Dislike: Thumb up 1 Thumb down 1

  23. Cycloptichorn says:

    Wow, you cited Pethokukis as a credible source of analysis??

    I really wouldn’t do that, personally. An examination of his history shows a lot of shoddy logic and faulty assumptions underlying his arguments; and he’s certainly no moderate. As other posters have pointed out, he’s long advocated the complete elimination of corporate taxes – something which no serious economist thinks should happen. Given that, how can his criticisms of Obama’s corporate tax plan be taken with anything other than a boulder of salt?

    Like or Dislike: Thumb up 4 Thumb down 0

  24. steve says:

    “A federal tax rate of zero on corporate earnings would be the best policy. The positive impacts on net job creation and macro growth would be a sight to behold.”

    While I favor a zero corporate tax rate, I dont think it will attract much business. Look at Ireland.

    Steve

    Like or Dislike: Thumb up 2 Thumb down 1

  25. Lomax says:

    Here are my ideas to help the middle class, working people through tax reform.
    Since food is so high, deduction for sales tax spent yearly on food.
    Since gas is so high, a yearly mileage deduction.
    A straight deduction for uninsured medical expenses.
    A tax free week – from Federal taxes. States are welcome to join in.
    Tax deduction for the exorbitant credit card interest and banking fees.
    Contributions to charities and churches would be counted twice.
    Tax deductions for educational expenses: from school supplies to masters degree tuition.

    Like or Dislike: Thumb up 0 Thumb down 1

  26. Brummagem Joe says:

    @Cycloptichorn:

    Wow, you cited Pethokukis as a credible source of analysis??

    Obviously Doug’s go to guy on economic analysis.

    Like or Dislike: Thumb up 3 Thumb down 0

  27. Brummagem Joe says:

    @steve:

    While I favor a zero corporate tax rate, I dont think it will attract much business.

    So why do you favor it?

    Look at Ireland.

    Ireland doesn’t have a zero rate it’s 12.5%. And it was actually quite effective at attracting business because it’s substantially below the rates in much of the EU. As part of the terms for the Irish bailout other Eurozone governments wanted them to raise it but they resisted which got Merkozy rather upset.

    Like or Dislike: Thumb up 0 Thumb down 0

  28. Console says:

    James Pethokoukis of “Dude where’s my recession” infamy, circa 2008…

    Why does he still have a job?

    Like or Dislike: Thumb up 3 Thumb down 0

  29. @Lomax:

    Since food is so high, deduction for sales tax spent yearly on food.

    Most states don’t charge sales tax on food to begin with.

    Like or Dislike: Thumb up 0 Thumb down 0

  30. Cycloptichorn says:

    @Console:

    Why does he still have a job?

    Oh, he’s on Wingnut Welfare – he’s not paid to be accurate, he’s paid to tell Conservatives what they want to hear. There’s no penalty for being wrong – only for not toeing the line well enough. Just look at what happened to Frum the minute he stopped being a good little soldier for his group.

    Like or Dislike: Thumb up 7 Thumb down 0

  31. Brummagem Joe says:

    @Console:

    Why does he still have a job?

    Disciples like Doug?

    Like or Dislike: Thumb up 1 Thumb down 0

  32. @Brummagem Joe:

    Here’s an interesting discussion of the territoriality issue at the FT

    Which I can’t see owing to the paywall.

    Like or Dislike: Thumb up 0 Thumb down 0

  33. Barb Hartwell says:

    I think its a great idea Even Reagan would like it since that is what he proposed too. These corps have had a pass for way too long in some cases not paying any taxes. We need to reward those corps in manufacturing that choose to build in the United States to get the economy built back up. Republicans just say no because Obama suggested it and their puppet masters would cut their strings.

    Like or Dislike: Thumb up 1 Thumb down 0

  34. Brummagem Joe says:

    @Stormy Dragon:

    Which I can’t see owing to the paywall.

    Sorry I subscribe.

    Like or Dislike: Thumb up 1 Thumb down 0

  35. steve says:

    “So why do you favor it?”

    1) It is a major source of corruption.

    2) Corporations spend huge amounts of money avoiding the tax. It really affects smaller corporations that cannot avoid it.

    ” And it was actually quite effective at attracting business because it’s substantially below the rates in much of the EU. ”

    Not that much business went there, mostly just “headquarters” for tax purposes.

    Steve

    Like or Dislike: Thumb up 0 Thumb down 0

  36. Brummagem Joe says:

    @steve:

    Not that much business went there, mostly just “headquarters” for tax purposes.

    In fact this is not the case. They were quite successful at attracting a lot of high tech industry.

    1) It is a major source of corruption.

    2) Corporations spend huge amounts of money avoiding the tax. It really affects smaller corporations that cannot avoid it.

    So how do all other developed societies who levy a corporate tax cope with these problems? Are we uniquely corrupt and incompetent at collecting corporate taxes?

    Like or Dislike: Thumb up 0 Thumb down 0

  37. Dazedandconfused says:

    @Gromitt Gunn:

    I hear that. But we wash our cars knowing they will get dirty again too. It’s better than doing nothing. That 35% may be a joke to the people that have the political suck to get loopholes, but to the small guys like me, it’s as real as a heart attack.

    I have my own personal theory that the big banks like it like this, because it strongly encourages me to borrow rather than
    save for operations or equipment. However, as the the saying goes “I don’t have any facts to back that up.”

    Like or Dislike: Thumb up 1 Thumb down 0

  38. Some of the reform the President proposes makes sense (like reducing the tax rate), but other components do not.

    The first problem is that the proposal calls for adding some special-interest tax breaks to the tax code (giving manufacturer’ a lower tax rate) which only leads to more tax unfairness. The second problem is that by putting a minimum tax on foreign profits, the US would be moving in the opposite direction of how our international trading partners treat foreign income.

    Experts agree that these are not the types of changes Congress should make to the corporate tax code. http://bit.ly/wkIlN5

    The most sensible way to reform the corporate tax code is by rebuilding it from scratch using the Bowles-Simpson plan as a guideline. With Bowles-Simpson type reform Congress can simplify the tax code, improve fairness, and spur economic growth by increasing the competitiveness of US companies. http://bit.ly/noTDPF

    Like or Dislike: Thumb up 0 Thumb down 0

  39. Dazedandconfused says:

    @David @ Engage America:

    I’d be all for that, but given the current situation of our politics, is that really a “sensible” course of action? By that I mean “doable”. Politics is the art of the doable.

    We must dream. It’s important, because that’s where the big ideas come from, but we must not ignore realities. Our form of government is structured in a way that encourages small, incremental changes and discourages wholesale ones.

    Like or Dislike: Thumb up 0 Thumb down 0

  40. @Dazedandconfused: That is unfortunately true. However, if we continue to only make incremental instead of wholesale changes then e will be in this economic rut a lot longer than we need to be.

    Like or Dislike: Thumb up 0 Thumb down 0