Barack Obama’s corporate tax plan is a good start. His proposal to reduce the top corporate tax rate to 28 percent from 35 percent and eliminate loopholes is an overdue initiative. But there’s also room for improvement. For one, to avoid boosting the deficit, the president suggests collecting more money from domestic multinationals, which would only make it tougher for them to compete abroad.
The objective is at least clear. The United States has a statutory corporate tax rate higher than most other developed nations, while its effective rate is in the middle of the pack. The 10 percentage point gap between the two figures is stark compared to the negligible one for the rest of the G7. Broadly speaking, the plan would enable Uncle Sam to tax more income at a lower rate. And in theory, that should keep the government out of the business of picking winners and losers.
But in practice, the president’s plan does so, in a bid to boost employment. U.S. companies in subsidy-starved industries like retail would be big winners. Their tax cuts would be paid for by multinationals. Obama wants an unspecified minimum tax on foreign earnings, which would bruise the likes of General Electric and Apple, which compete in lower-tax regimes. Depending on the details, that could affect factors like the cost of capital.
The Obama administration also nods to manufacturers by slashing the industry’s top effective tax rate to three percentage points lower than the ceiling for others. Green energy firms also would benefit from extended subsidies, while fossil-fuel producers would lose precious loopholes.
Despite these accommodations, the president does aim for fairness elsewhere. For instance, he would get rid of the carried interest tax loophole allowing hedge fund and private equity bosses to enjoy low capital gains rates on their regular income. Other archaic provisions also would be eliminated.
Such aggressive reform doesn’t stand much chance in an election year, but the president has moved the ball in the right direction. His likely Republican opponent in November, Mitt Romney, wants the top corporate tax rate at 25 percent. That should mean for once there’s actually some middle ground.