Thursday, February 23, 2012

Does Obama's Corporate Tax Reform Impress Me?

I love how this is the question that is going to keep me up tonight, well, at least until I answer the question. Obama's plan is to reduce the top corporate tax rate from 35% to 28%, and the effective rate for manufacturing will be lowered to 25%. Given that I'm libertarian, my ears perk up when I hear the words "tax cut," especially since America has one of the highest corporate tax rates amongst the OECD nations. Historically, the United States has had a varied corporate tax rate (see IRS data). The proposal does not put it as low as the 1% it was during the early 20th-century, but at least it's not as high as the 52.8% as it was in the late 1960s.

However, I do have to put this in context. First is that Democrats haven't exactly been the most ardent supporters of tax cuts. The second is that a tax cut is not in line with Obama's ideological stance. The third is that it's a re-election year, and anything that the incumbent does around re-election is thus suspect. Do I have good reason to be suspect of this tax reform?

I see this tax deduction is nothing more than misdirection from the fact that Obama is also raising the dividend tax, not to mention the imposition of a "minimum foreign tax." Also, as Cato Institute tax reform expert Dan Mitchell points out, the government already forces the government to overstate its income, which is not addressed in Obama's tax reform. Although Obama is addressing the need to close loopholes, he fails to address the complexity of the tax code, which is in dire need of simplification. Interestingly enough, an OECD study stated that not only is tax complexity harmful, but the corporate tax is especially harmful to a given economy (re-affirmed by the Tax Foundation, although I do have to wonder if this particular study proves causation if the R-squared is only around 0.24).

It would have been nice to see revenue-neutral tax reform or a further tax reduction. One has to keep in mind that this rate does not even include state-level corporate taxes. In Europe, the total corporate tax rate is only 23%. If those in Europe who are all for the social welfare state have at least enough common sense to keep the corporate tax rate low, you would think that America would. How else do you expect America to maintain its competitive edge when its corporate tax rate is still above average?

Obama attempted to address the root cause, which is the corporate tax rate needs to be lowered. However, Obama's plan did not do enough to solve the problem, and as such, I'm anything but impressed.

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