Better Tax Reform Would Tax All Business at One Low, Flat Rate
Obama proposal plays favorites, and would simply make matters worse
February 24, 2012
Obama's corporate tax reform is hardly worthy of the term. It's one of the least-effective, most destructive tax reform plans seen in recent memory.
It gets one and only one thing right: The Obama plan recognizes that the 35 percent U.S. corporate income tax rate (soon to be the highest in the developed world) is causing companies to do business with tax accounting in mind as the foremost concern. That should not happen. Companies should instead try to make the most money they can in business transactions, and the tax code should be neutral as to how they do so.
Even there, the rate reduction is not enough to beat our trading partners' rates. The Obama plan would reduce the federal corporate income tax rate from 35 to 28 percent (plus states). The developed nation average is 25 percent. The rate Obama proposes would still leave us with a higher rate than major trading partners Canada, Mexico, the United Kingdom, and Germany. We would only have a leg up on Japan and France. Why bother with the effort if we're not going to have the most competitive rate among our major trading partners? To get there, he would have to lower the federal rate to 20 percent or less.
The Obama plan also raises taxes on the 30 million businesses that don't file as corporations, but pay business taxes using the individual rates. The top rate (at which a majority of such business income faces taxation) rises from 35 percent today to over 40 percent in 2012. For these employers, what Obama proposed is the nightmarish bizarro-world of tax reform: Raise the rates and broaden the base.
The plan doubles down on the double taxation of international corporate profits, forcing larger employers to pay extra tax to the IRS on top of income taxes they have already paid overseas. Rather than moving toward full expensing of all business purchases, the Obama plan goes in the wrong direction and lengthens depreciation lives. It rewards some companies (manufacturers, green energy), and punishes others (airplane makers, traditional energy suppliers), a classic case of picking winners and losers. It makes the double taxation of corporate income worse by increasing the capital gains and the dividends tax rate for shareholders—the latter by 300 percent.
A better tax reform would tax all business profits at one low, flat rate.