Reactions to Obama’s Corporate Tax Plan

I don’t usually like to comment on things like candidate tax plans, since they rarely see the light of day and actually affect anything, but I had several reactions to an article I read about a plan from Obama this morning.

The New York Times says, “Obama Offers to Cut Corporate Tax Rate to 28%.” The United States is frequently cited as having the highest or one of the highest corporate tax rates in the world, and as a result, corporate tax revenue has actually been shrinking as businesses play international accounting games to avoid that rate. (A few months ago Twitter joined the technology trend and set up an office in Dublin, Ireland.) I know Republicans have been complaining about that tax rate for years, so it’s nice to see Obama now joining the effort to lower it.

Of course, Obama can’t resist trying to do it in a government-optimizing technocratic manner. He wants to lower the maximum rate from 35% to 28% but give “preferences to manufacturers that would set their maximum effective rate at 25 percent.” He probably thinks that’s a brilliant way to “help” out our manufacturing industry; I think it’s one of those arbitrary differences that causes unintended consequences and invites definition lobbyists. Hey, maybe non-manufacturing businesses will start buying those newfangled 3D printers so they can get classified as “manufacturing” and get the lower rate!

One thing I don’t understand is the apparent insistence that lowering the tax rate has to be revenue-neutral – the goal seems to be closing loopholes and tax breaks to “pay” for lowering the overall rate. While I tend to think that, all else being equal, simpler tax plans are better than complex ones that tend to have more arbitrary differences, I’m not convinced that this would affect the overall corporate tax problem. “Corporate taxes make up an increasingly small share of the federal government’s revenue, in part because of tax-avoidance maneuvers by businesses.” So if revenue is down because the tax is too high and businesses are avoiding it, but on average the new plan will still extract the same amount of revenue from these businesses, then how will this plan encourage businesses to stop playing their international accounting games?

I think we need to lower the tax rate with the goal of increasing revenues by reducing the incentives to avoid the tax, since that’s supposedly the reason we need to lower the tax rate in the first place. I realize that sounds a lot like the Republican magic dust of “lower taxes always increases revenues,” and there’s apparently a Laffer curve which says that’s only true under certain conditions, but I think there’s a difference between hoping that lower taxes will encourage people and businesses to spend more money, and expecting more businesses to pay you more taxes because you’re changing a policy that you claim is driving businesses away.

But maybe that’s harder than it sounds. “An analysis in November from Congress’s nonpartisan Joint Committee on Taxation…reported that even if every corporate tax break were scrapped, the 35 percent corporate rate could not be reduced below 28 percent without adding to deficits.” Does that mean they’re not expecting that many companies to come running home with the lower rates?

Finally, another detail of the tax plan looks to me like it’s still playing cat-and-mouse with multinational corporations. “Mr. Obama also would establish a minimum tax on multinational corporations’ foreign earnings… While the United States is virtually alone in taxing multinational companies’ foreign earnings, it allows the companies to avoid taxes indefinitely by keeping profits overseas. But that encourages accounting schemes and offshore investments, critics say.”

So let’s see if I have this straight: First, the US has a high corporate tax rate relative to other nations. So corporations respond with accounting schemes to shift money to nations with lower tax rates. Second, US responds not by lowering the tax but by adding a tax on “multinational companies’ foreign earnings.” So these corporations respond with more accounting schemes “by keeping profits overseas.” US responds not by eliminating the multinational tax but by trying to set a minimum on it?

Now I may be missing something above, but am I supposed to believe the corporations won’t just find another way to avoid that rule? Is this administration trying to double-down on a failed strategy instead of considering that the corporations will always be one step ahead? Why is it unacceptable for the United States to be “virtually alone” in not providing healthcare to its citizens but reasonable to be “virtually alone” in tax schemes like this one?

Ah, well, I should at least give Obama credit for trying to lower the high corporate rate. The article talks about political obstacles, but maybe it will actually happen one day. If there’s one thing Republicans and Democrats have never had trouble accomplishing once they decide it’s a common goal, it’s lowering taxes.