At first blush, headlines such as “Obama Unveils Plan to Cut Corporate Tax Rate” seem out of place. Isn’t it more likely that Republicans would push for a corporate tax cut? With all of President Obama’s recent economic populism, does this signal a move to the right?
President Obama asked Congress on Wednesday to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent.
Mr. Obama’s proposal, outlined by Treasury Secretary Timothy F. Geithner at a midday briefing, also would establish a minimum tax on multinational corporations’ foreign earnings – a feature that Republicans immediately denounced.
The problem is with the dramatic flaws in the status quo. On paper, the corporate tax rate is 35%, but thanks to a series of loopholes and tax giveaways, plenty of corporations pay a rate much lower than that (and some end up paying nothing at all).
The resulting structure is a mess – we have high rates, but collect less revenue because the code is filled with enough holes to resemble Swiss cheese. When Obama talks about lowering corporate tax rates from 35% to 28%, he’s also talking about getting some corporations to start paying the taxes they’re avoiding now.
It seems hard to believe, but the data is unambiguous: we have one of the highest corporate tax rates in the world, but the actual income tax paid by corporations “is one of the lowest in the world.”
David Leonhardt had a good piece on this a year ago, noting not only the loophole-ridden status quo, but also the fact that the system isn’t actually generating the revenue for the treasury it’s supposed to. Among Leonhardt’s findings: about a fourth of the companies included in the S&P 500 pay a total corporate tax rate of less than 20%. “Over the last five years,” he reported, “Boeing paid a total tax rate of just 4.5 percent, according to Capital IQ. Southwest Airlines paid 6.3 percent. And the list goes on: Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.”
The politics of this is trickier than it should be. The White House and congressional Republicans agree that reform is worthwhile, but those loopholes that lower corporate tax burdens are tough to eliminate for obvious reasons – powerful businesses are paying a small fraction of what they’re supposed to pay, and they’re going to hire a legion of lobbyists to keep those loopholes in place. It’s one of the reasons today’s announcement from the administration is interesting, but not expected to make much of a difference of on Capitol Hill.
Still, it’s a debate worth having. The new administration plan closes a series of loopholes, ends unnecessary tax giveaways (including breaks for the oil industry), and eliminates the “carried interest” policy that allows folks like Mitt Romney to pay a lower rate than the middle class.
It’s not perfect – like Robert McIntyre, I’d prefer a tax-reform plan that actually raises new revenues – but if this is an opening bid from the White House in anticipation of a larger debate over tax reform, it’s not a bad place to start the conversation.