Obama's New Corporate Tax Policy Would Open More Loopholes
Proposals will put the U.S. further out of step with international competition for capital
February 24, 2012
The U.S. corporate tax rate is about 40 percent, counting federal, state, and local. That is the second-highest corporate tax rate among the 34 industrialized countries that make up the Organisation for Economic Cooperation and Development, or OECD, and when Japan lowers its rate on April 1 we will be No. 1. That's not only bad economically, but it's a public relations disaster that the president cannot well ignore. In response, the administration proposes to lower the federal rate to 28 percent, which would bring the combined federal/state/local rate to 32.6 percent. That's moving in the right direction, but would still give us the fourth-highest corporate tax rate in the OECD—a full seven percentage points above the OECD average.
Worse, the administration turns this rate decrease into an overall tax increase by closing various "loopholes," real or imagined. If the goal is simplicity, it fails miserably. By my count, the proposal takes away just six of the estimated 250 loopholes in the tax code. These six are mostly minor in terms of revenue, and mainly target industries that have fallen out of favor with the administration: oil and gas, corporate jets, insurance, and hedge funds. But then the administration proposes to add 11 loopholes, for a net gain of five loopholes. Most of these go to industries deemed worthy by the administration: renewable energy, small business, domestic manufacturing, and companies operating abroad that choose to move back to the U.S. All of this is very complicated to implement, if not impossible, and it is at odds with the administration's stated goals of simplicity and fairness.
Finally, while this has not been officially scored yet, it appears that the big money is raised by reducing the deductibility of interest. This is a fairly unprecedented maneuver that could potentially double corporate tax revenues, if the interest deduction were fully eliminated. The administration is right to point out that the tax code distorts investment decisions by favoring debt over equity financing, but such a massive tax increase without a commensurate decrease in the corporate rate and/or the rate on capital gains and dividends will surely put the U.S. further out of step in terms of the international competition for capital.