Obama Budget Proposes Sensible Overhaul of Corporate Tax Loopholes

Lowering the corporate tax rate would cost jobs.

Mind you, the job loss would not be among those sad grunts now pictured in newspapers, signing up for unemployment benefits. No, the new unemployed would be the well-paid tax attorneys who scour the tax code for loopholes. They would be followed in the unemployment line by the lobbyists who bustle around Capitol Hill fighting to keep those loopholes.

On its face, the current corporate tax rate seems punishingly high. There’s a very strong argument to be made that businesses, large or small, will be reluctant to hire or invest when faced with a marginal tax rate of 35 percent. And entrepreneurs might similarly feel discouraged from taking a risk when the rewards will be so heavily taxed. [Check out a roundup of political cartoons.]

Oh, were that it were so. Big corporations are masters at finding the (legal) loopholes that enable them to pay little or no tax. General Electric, for example, generated $10.3 billion in revenues in 2009, but paid no taxes on it—in fact, the company had a tax benefit of $1.1 billion, according to an excellent and maddening analysis by Forbes magazine. In 2008 the company’s effective tax rate was 5.3 percent, and in 2007, it was 15 percent. Other big companies behaved in a similar manner, avoiding taxes by cleverly putting their costs in U.S.-based enterprises and their profits, in lower-tax venues abroad. [See who donates the most money to your member of Congress.]

President Obama, in his budget, calls for an overhaul of the corporate tax code. While not mentioning specifics, the Obama administration wants to get rid of some loopholes, simplify the code itself, and lower nominal corporate tax rates. That’s a sensible approach to the entire tax code, except that the intricate network of lobbyists and special interests in Washington have made it extremely difficult, politically, to rid either the personal or corporate tax code of deductions and loopholes. If Congress and the White House can agree on even a partial overhaul of corporate taxes, perhaps there’s hope for overall tax reform.

Of course, that would be bad news for tax lawyers and lobbyists—especially when they learn that unemployment benefits are taxable.

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