The Obama administration is
proposing to cut the corporate tax rate from 35 percent to 28 percent (25 percent for manufacturing), close scores of loopholes that currently reduce the effective tax rate, put a minimum tax on foreign profits and simplify tax filing for small businesses. You can be certain of two things: Republicans and many corporate mouthpieces will say the cut doesn't go deep enough; and, when the nitty-gritty is dealt with in the congressional committees that will review it, expect a major drive to lower the rates and keep at least some of the loopholes. Because when it comes to tax rates on corporate profits (and high-income individuals), the right believes they can never be low enough.
The proposal also keeps credits for research, development and production of electricity from renewable sources. The goal is to spur investment in wind, solar and geothermal power. One of those credits, the production tax credit, expires in December.
It being an election year, the chances that any proposal will wind up on the president's desk before 2013 is small. John Hudson at Atlantic Wire says it's "sensible" but bound to fail. But the issue is also bound to be part of the debates once the Republicans settle on a presidential nominee. The White House proposal—the culmination of two years' work—will certainly serve to undercut any GOP attempt to say the administration is doing nothing to deal with what people across the political spectrum agree is an antiquated corporate tax system riddled with often inefficient breaks, most of which are taken by the largest companies.
As has been widely reported for years, the effective (read: actual) corporate tax rate is far lower than the 35 percent headline rate that gets all the bad press. Last year, Citizens for Tax Justice reported on the 280 most profitable Fortune 500 companies. Findings? Thanks to tax breaks and subsidies, the average effective tax rate over the three-year 2008-2010 period was 18.5 percent and the companies enjoyed subsidies of $222.7 billion. During at least one of the three years, 78 highly profitable companies paid zero taxes and 30 actually had a negative tax rate.
But that's not the worst of it. In 2011, according to the Congressional Budget Office, the effective corporate tax rate fell to 12.1 percent, the lowest level in 40 years. This comes at time when corporate profits are at a 60-year high.
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One key argument made by those who seek to reduce the corporate tax rate has been that the U.S. rate is higher than other developed nations, particularly those in the Organization for Economic Cooperation and Development. It's true that those nations have lower corporate rates, on average. But typically unmentioned in the discussion is the fact that most of them have a higher capital gains tax on individuals. For instance, Ireland's corporate rate is 12.5 percent compared with the U.S. 35 percent rate, but it taxes dividends as high as 41 percent.
According to Fiscal Times, a study by University of Michigan law professor Reuven Avi-Yonah and Ben Gurion University economist Yaron Lahav published last year revealed that the headline tax rate is around 10 percentage points higher in the United States, however, "the effective tax rate paid by U.S. and European companies is about the same because European companies get fewer tax preferences."
The 28 percent tax rate the administration has settled on for all but manufacturing enterprises is in line with a report last year from the Joint Committee on Taxation. According to that report, reducing the rate to 28 percent would cost the Treasury some $717 billion over a decade. That could be paid for by eliminating all corporate tax breaks and subsidies, including those of the oil and gas industry that Republicans have refused to nick a dime from. Lowering the rate any further—say, to the 25 percent Rep. Paul Ryan, the U.S. Chamber of Commerce and Mitt Romney have pushed—would require raising tax rates for someone else, cutting federal spending or increasing the national debt.
But does anybody seriously believe that all those loopholes will be axed to pay for the lower rate? Or that they won't steadily creep back into the tax code starting before the ink is dry?
Cutting the corporate tax rate, or better put, establishing a higher effective corporate tax rate could be a good thing. But it should be coupled with a higher tax rate on high-income individuals.
One change in that respect should come from ending the practice of taxing capital gains income at a much lower rate than income earned from wages or salaries. As needed as such a change is, you can count on it to elicit cries of "socialism" from the elite. And count as well on the corporatist megamedia to trumpet the idea that a higher tax on the highest incomes would somehow be a threat to those of more modest means.