The Obama administration unveiled a plan Wednesday to cut the top corporate tax rate from 35 to 28 percent, along with putting in place specific changes to simplify the tax code and spur growth. The president's plan would lower manufacturers' top effective tax rate to 25 percent, eliminate several loopholes and expand some tax credits, like for research and development. When the full scope of the plan is taken into account, the administration maintains the plan will won't contribute to the deficit.
How effective the proposal might be is a matter of perspective. With an election year upon us and a hyperpartisan congress at work, there a number of different ways to look at the impact of the president's tax deal.
An Earnest Attempt to Broaden the Tax Base
According to the proposal, the U.S.'s top corporate tax rate is 39.2 percent, which is topped only by Japan among G-7 countries, and is far higher than the G-7 average of 32.3 percent. As Treasury Secretary Timothy Geithner told reporters Wednesday, the new plan will make the U.S. more attractive globally as a place to do business.
However, the plan's real value may come in broadening the tax base. U.S. corporations have long been taking advantage of deductions and tax shelters. According to the Congressional Budget Office, corporations paid an effective rate of 12.1 percent in fiscal year 2011. That's the lowest rate since at least 1972, when the CBO started keeping track of corporate tax rates..
"From my perspective, the biggest advantage for a reduction in corporate tax rate is it reduces the incentives to get involved in all of those tax shelter activities," says Thomas Lys, an accounting professor at the Kellogg School of Management at Northwestern University. When a corporation uses a tax shelter, he says, it's not benefiting the economy.
"We are not better off, but lawyers and accountants are better off, because they make money on creating these monsters," he says.
A Push for More Campaign Funds
The president's plan "is not a game changer" by any means, says Steven Schier, a political science professor at Carleton College. "I really don't think that a lot of businesspeople are going to be changing who they support based on Obama's new proposal," he says. "But what it may do is...allow him to raise more money from people in the business community who are already sympathetic to him." With money playing a bigger role than ever in this year's elections, Obama may be hoping this tax proposal keeps the federal government's coffers full while allowing donors to fill the ones tied to his reelection campaign.
Increasing His Centrist Cred
For many voters, the particulars of tax policy are more likely to induce a nap than a spirited debate. But Schier says reducing corporate tax rates can show that the president is appealing to voters beyond his base.
"In terms of the electorate, it's a move closer to the center," he says. "This will position him better to make that spiel that he is not a wild socialist, that he's interested in pro-growth, pro-business policies and so forth."
Another Initiative for the List
In recent months, the White House has rolled out a bunch of new policies. In September, Obama unveiled the American Jobs Act. October brought a revamp of the Home Affordable Refinance Program, allowing troubled homeowners to refinance their mortgages with greater ease. He also introduced a plan in October to cut student loan interest rates.
He also has recently sought the authority to consolidate federal agencies in order to create a "leaner government."
The string of initiatives shows that the president is engaged on a number of issues—even if they don't always come to fruition. For corporate tax reform to become a reality, it would need to be passed by an often-deadlocked Congress.
"That's also an issue for Obama—the do-nothing Congress," says Schier. "By putting this issue out there he's saying, 'Look; this is what we need to do,'" and showing that he's willing to take action.