The voices of Tax Policy Center's researchers and staff
The other day, President Obama told the Business Roundtable that he’d like to lower the corporate tax rate “in exchange for closing a lot of the loopholes that make the tax system so complex.” And so inefficient, he might have added.
It is a great idea, and something that many other developed countries have done in recent years. But Obama has two problems.
The first is that he keeps extending targeted business incentives, such as the research credit. Elminating these tax breaks makes good sense. But Obama is not only not eliminating old loopholes, he’s even created a few new ones.
The second is that he’s on the road to creating a troublesome spread between corporate and individual rates. In his budget, Obama would raise the top individual rate to nearly 40 percent. The president has never said how low he’d cut the corporate rate, but in 2007 House Ways & Means Committee Chairman Charles Rangel (D-N.Y.) proposed taking it down to about 30 percent.
That spread between an individual rate of 40 percent and a corporate rate that is 10 percentage points lower could create a wide range of sheltering opportunities.
Today, this is not a problem since the top corporate and individual rates are 35 percent. Indeed, in recent decades lawmakers have tried to keep the two rates relatively close together. For instance, in the major tax reform of 1986, the top individual rate was cut from 50 percent to an effective rate of 33 percent and the corporate rate was trimmed from 46 percent to 34 percent. Rarely have the two rates moved in opposite directions as Obama would have them do.
There are some excellent reasons for cutting the corporate rate. It would make it easier for the U.S. to attract foreign capital, especially important at a time when it is relatively simple for companies to shop for the lowest rates by moving capital from country to country. Given the current state of the economy, encouraging investment in the U.S. seems like a very good idea.
Could the Obama spread be fixed? He could limit the lowest rate to public companies. But imagine the political blowback if small business had to pay higher rates than multinationals—especially those that are so often accused of shipping American jobs overseas.
Obama is on to something. But sadly, when it comes to cutting corporate rates, he may be talking the talk, but he’s not walking the walk.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.