Monday, February 27, 2012

President Obama’s Interesting, Constructive and Futile Attempt at Corporate Tax Reform

Giving Opponents What They Asked For – Except They Will Not Want It

As an election year gimmick, tax proposals are pretty interesting, at least more interesting than most election year gimmicks.  This year we have Republicans racing each other to eliminate as much tax revenue as possible, never mind the deficit, Mr. Romney flip flopping on his own plans, and now Mr. Obama proposing corporate tax reform.

The Obama plan is labeled reform rather than reduction because it claims to be revenue neutral.  In this way it changes the tax system but does not change the amount of revenue the government collects from the corporate income tax.  For this reason alone it is DOA at the Congress, where Republicans would like to reduce the tax burden on “people” (“Corporations are people my friend”).  However there are some interesting aspects to the President proposal.

The first thing to note is that the President’s plan lays out the difference between statutory tax rates and actual or effective tax rates.  While the U. S. has high statutory rates, it doesn’t really matter because a lot of corporations don’t pay those rates.  The effective rate, what the corporations really pay is just about equal to the average of major economies.  As everyone can see, that argument about the U. S. having the highest rate is just not true, not that this fact will stop politicians from claiming it to be true.

TABLE 1: 2011 G-7 STATUTORY CORPORATE TAX RATES (IN PERCENT) Country Statutory Corporate Tax Rate
(including subnational taxes)
Effective Marginal Tax Rate
(including subnational taxes)
Canada 27.6 33.0
France 34.4 28.3
Germany 30.2 23.3
Italy 31.3 24.0
Japan 39.5 42.9
United Kingdom 26.0 32.3
United States 39.2 29.2
G-7 average excluding the U.S.a 32.3 31.9
a. The G-7 Average is calculated using 2010 gross domestic product (in current US dollars) as weights. Source: OECD.
b. See Table A1 in Appendix I for an explanation of the methodology for calculating the effective marginal tax rate.

However, even as the United States has among the highest statutory corporate tax rates, the effective marginal tax rate on corporate investment in the United States is similar to that in other competitor countries (see Table 1). The effective marginal rate represents what businesses would actually expect to pay on a marginal investment. The discrepancy between where the United States ranks in terms of the statutory rate and in terms of the effective marginal rate comes about for a number of reasons.

So what else is in the proposal that is of interest?  Well there is some silly stuff, like changing the way corporate aircraft are treated for tax purposes, some serious stuff like making wealthy buy-out fund managers pay income tax on their income and some strange stuff.  What is an example of some strange stuff?  Well the program would change accelerated depreciation which allows for investment to have a shorter depreciation life than its physical life.

In an increasingly global economy, accelerated depreciation may be a less effective way to increase investment and job creation than reinvesting the savings from moving towards economic depreciation into reducing tax rates

This is strange because the President just finished implementing a policy that allowed for immediate write off of investment, the greatest accelerated depreciation there can be.

There is some really good stuff in here, like requiring corporations to pay a minimum tax on their foreign earnings, eliminating tax deductions for moving production offshore, and giving a tax credit for moving production from off shore to the United States.  All good proposals that will fail to gain Republican support, probably because they are good proposals and one thing Republicans do not want  is to ever do what’s good for the country if it means giving the President an accomplishment.

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