Corporate tax cut: Good idea, but won't stimulate economy

The White House is proposing to cut corporate income taxes from 35 percent to 28 percent. President Obama also recommends that manufacturers get a further cut, to 25 percent, and he wants to impose a minimum rate on foreign earnings to discourage the use of tax shelters. There would other less substantive changes as well under his plan.

The cut in the statutory tax rate, however, may not have as large an effect on the corporate sector as many anticipate. The reason is that this is intended as a revenue neutral change in taxes. To accomplish revenue neutrality, the cut in the tax rate will be accompanied be closing loopholes, i.e. a broadening of the base. Thus, every company receiving a tax break will be matched somewhere else by companies experiencing a tax increase. Thus, while some firms will benefit, others will get hit harder by these taxes and the net effect overall should be roughly a wash.

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Another way you think about this, as noted by Jared Bernstein, is to consider the difference between the statutory tax rate -- the rate on the books -- and the effective tax rate, the rate after all deductions, loopholes, etc. have been exploited. The US has a relatively high statutory tax rate of 35 percent, but the effective tax rate is quite competitive with other country's rates (according to this estimate, it is 26 percent, about average for developed countries), The administration's plan would decrease the statutory tax rate, while at the same time increasing the effective rate for many firms by eliminating deductions and closing loopholes that allow firms to reduce their effective rates so far below the rate on the books. As Bernstein points out, these include "accelerated depreciation, interest deductibility, the ability to pass corporate capital gains over to the individual side of the code (where it gets favorable treatment), and a bunch of international loopholes, like deferral -- the ability to avoid U.S. taxation by holding multinational profits overseas."

Making the corporate tax system more equitable and more efficient is important, and this proposal takes steps in this direction, particularly on the equity front. Under current rules there is too much variation in the rates paid by companies that are very similar. However, since the proposal is revenue neutral, and is thus mainly a redistribution of the corporate tax burden rather than a cut in taxes, we shouldn't expect too much in terms of its ability to stimulate the corporate sector and the overall economy.

[realtvcritics]

By the way I find it a poor use of journalistic tactics to use a headline in the email from Moneywatch calling President Obama by his last name only. It's always President Obama or President Bush or President Clinton or the old school, first President Bush.

One day journalism in the year of the stupidity will give these men the respect they deserve. Once again it's President Obama not Obama.

[rvauthor]

It is interesting that presidential candidate Romney tells us that corporations are people.

Gov. Romney and the Supreme Court may think so, but if they are people, why don't they serve in the Armed Forces?

If they people, why to they tell us that they should not pay taxes to protect the Liberty they enjoy?

If they people, why don't they go to prison when they are convicted of commiting crimes?

[tb1980]

This is all a sham...Most major 500 companies dont pay taxes anyway so what would this be? Another GE tax rebate? After all GE paid no tax and received a 300 million dollar rebate,Imagine that! It all sounds good but really just another giveme to them All.

[peajayach]

Like so many others, you consider your opinions to be facts. Unfortunately that's not reality. Gathering pertinent facts before you reach a conclusion is essential in achieving an objective point of view.

[dman6015]

It's not about stimulating the economy. It's about fairness in taxes. Pay the amount you should, without loopholes. And if that means closing some 'loopholes' for individuals (like mortgage interest, sales tax deduction, etc.), then so be it.

[rainbowroosie]

"The administration's plan would decrease the statutory tax rate, while at the same time increasing the effective rate for many firms by eliminating deductions and closing loopholes that allow firms to reduce their effective rates so far below the rate on the books."

Misleading article; Obama's plan RAISES taxes.

[Osprey4]

Only a simpleton thinks this is a tax cut. This policy represents a significant tax INCREASE on US companies, who will be required to pay US Corporate taxes on foreign earnings for the first time. Foreign companies, obviously, will not.

Think about this. GM will pay corporate tax rates on profits earned in the US as well as Europe and Asia. Toyota, on the other hand, will pay US corporate taxes on US profits, but not Europe and Asia.

You heard right. American companies will be penalized and relative to their foreign-owned peers, less competitive. No wonder jobs are moving overseas.

[lonestar9000]

How about tying the tax rate to management salaries and bonuses? The higher the salaries, the more tax the company pays. I've always found it a little hard to believe when a company pays dozens or hundreds of millions in bonuses and pay to a handful of executives, then announces it made no taxable income for the year.

[dnamj]

Seems like a smart way to start reducing the amount of corruption, and to encourage companies to play by the rules, which would be good for workers.

[sjc_1]

It is NOT meant to stimulate the economy, it is meant to have a simpler, fairer tax system, so that everyone pays their fair share, no loopholes. MOST people agree, close the loopholes and you can have a simpler system with lower rates. No more make work for tax attorneys and accountants cooking up loopholes anymore.

[JesseStout]

Politically not a bad move.

Now Obama gets to scream "I cut the corporate tax rates!" which is simple and therefore good for campaigning.

His Republican foes will not be able to say, "He only cut the statutory and not the EFFECTIVE tax rate" because that is too convoluted to understand.

Nice to see the left using some smart political tactics because the right is never shy to do the same.

[1notrub11]

Yes, heavens, we wouldn't want to deliver an accurate message - only what is "easy" to understand. Part of the problem, not part of the solution.