Echoing members of Congress and policy analysts across the political spectrum, President Obama has long said that the corporate tax rate is too high. On Wednesday, he proposed a framework that lowers the top corporate tax rate from 35 to 28 percent and offsets the revenue loss by curtailing various business tax credits and deductions. Although the proposal sounds like a step forward, closer examination reveals that it is unlikely to benefit the overall economy.
1. The reform proposal is unlikely to lead to an increase in investment. While the corporate tax rate reduction promotes investment, the curtailment of deductions and credits goes the other way. Because it offers no net business tax reduction, the framework does not lower the total tax burden on investment. Indeed, it likely raises effective tax rates on new investments generally, while providing unnecessary and unwarranted benefits to capital already in place.
2. The framework doesn’t end the practice of using the tax code to pick winners and losers—it just picks different winners and losers. While rightly noting that the tax code is littered with special breaks for favored industries and activities, the administration’s report moves to repeal just some, while adding or expanding others. Much like Senator Santorum’s proposal that conservative economists have criticized for creating a new industrial policy, the framework expands tax breaks for manufacturing and proposes an extra subsidy for undefined “advanced manufacturing.” On top of that are increases in tax subsidies for renewable energy.
3. The proposal raises taxes on global expansion by imposing a minimum tax on foreign-source income and altering other tax rules. The Obama administration continues to assume that tax increases on foreign investment by U.S.-chartered firms will lead to greater investment in the United States, when they are more likely to lead to those overseas investments being made by foreign-chartered firms instead.
The framework does an excellent job of describing the problems with the current corporate tax system—and there are many—but doesn’t follow through with effective solutions. One of us has detailed elsewhere a plan to lower the corporate tax burden and offset the revenue loss from elsewhere in the tax system, an approach that is more likely to boost investment and promote long-run economic growth.