President Barack Obama’s proposal to lower the tax rate on U.S. corporations to 28% from 35% and to close dozens of tax loopholes does not go far enough to make much of an economic difference.
If enacted, the U.S. would go from having the highest corporate tax rate to the fourth highest, after Japan, France and Belgium, according to a blog post by Scott Hodge, president of the Tax Foundation. When the average tax rate of 6.4% is factored in, the proposed cut is even less impressive, since it would result in rates of 32.6%, still above the 25% average of the members of the Organization of Economic Cooperation and Development. Hodge writes:
“Let’s not forget that none of these changes are happening in a vacuum. On January 1st of this year, the Canadian corporate rate fell to 15 percent from 16.5 percent and the British corporate rate fell to 25 percent from 26 percent. And, as is well known, Japan will cut their overall rate to 38.01 percent from over 40 percent on April 1st.”
The timing of the plan is purely political. Republican presidential candidates have each argued that the U.S. needs to lower its corporate tax rate. There are a few problems with this idea. First, the link between low corporate tax rates and economic prosperity is not as clear-cut as some argue. For instance, Ireland has a corporate tax rate of 12.5%, one of the lowest in the world, and is an economic basket case. The U.S. is one of the few areas in the world where economic growth in 2012 will top 2011, even with high corporate tax rates.
Even if the corporate tax rate is cut, there is no guarantee that businesses will use the savings to hire U.S. workers or even invest in America. Companies may choose to sock it away in the bank or use it to fund dividends and acquisitions.
Obama’s plan, which seeks to raise $250 billion in 10 years, pays for itself by eliminating dozens of loopholes such as those that encourage businesses to shift income and assets overseas. Unfortunately, many experts have pointed out that many of these jobs were shipped overseas in recent years and are not coming back.
Companies would also no longer be able to keep their tax liabilities low by gimmicks such as the “last-in, first-out” (LIFO) method of accounting for inventories, where it is assumed that the cost of the items in inventory that are sold is equal to the cost of the items of inventory that were most recently purchased or produced. Experts have noted the flaws in LIFO, which is used mostly in the U.S., for years.
“Companies adopt LIFO primarily to lower their income tax liability and to postpone paying taxes, but it also reduces income for financial reporting purposes,” according to a 2009 article in the Journal of Accountancy.
The tax proposal would also end most tax breaks that are designed for specific industries such as the oil business.
Eliminating the tax breaks for the oil industry is not a new idea. Critics have long questioned why the industry needs $4 billion in subsidies and tax breaks annually at a time when it generates record-breaking profits. Obama’s budget proposal calls for higher taxes on the industry as well. Not surprisingly, big oil sees things differently.
“To spur new jobs, the president advocates tax breaks for everyone but the oil and gas industry — the one sector with the proven ability to create jobs and already supporting 9.2 million of them,” according to a recent American Petroleum Institute statement.
The odds of Congress passing the Obama plan in an election year are slim to none, but the debate over corporate tax reform is far from over.
The opinions contained in this column are solely those of the writer.
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