President Obama has put out a “framework” for a tax reform proposal, that is very short on details but would essentially trade lower marginal tax rates for corporations for the elimination of “loopholes” — good luck getting a coherent definition of what that is — that will supposedly raise more revenue. And the experts are pointing out some of the problems with it. Scott Hodge writes:
Also, it is ironic that Obama is proposing a 20 percent tax cut for corporations just weeks after proposing a “Buffett rule” for high-income individual taxpayers, many of whom are pass-through businesses such as S-corporations and LLCs. Interestingly, the top corporate tax rate and the top individual tax rate are at the same level – 35 percent – for the first time in the history of the U.S. tax system. I thank that parity should be maintained, but under Obama policies we would have a 28 percent corporate tax rate and a top individual of at least 39.6 percent. Thus you would see an exodus of S-corporations flipping to C-corp status…
The plan creates a new 25 percent tax rate for manufacturing – perhaps, even a lower rate for “advanced” manufacturing. We can only imagine the feeding frenzy this would generate from lobbyists to get their industry declared manufacturing. As it is, the current “199” manufacturing deduction that was enacted in 2004, is available to architects, companies that grind hamburger, software firms, and companies that produce rap albums.
He’s right about those things, of course. And Obama’s plan doesn’t really eliminate “loopholes,” it only moves them around a bit. And here’s what The Economist has to say about it:
But deciding whose tax breaks get closed is what makes tax reform hard. Mr Obama has called for, and proposed budgets that include, eradication of a dog’s dinner of loopholes covering inventory accounting, oil and gas production, corporate life-insurance policies, hedge-fund profits, and corporate jets. He would impose a minimum tax rate on foreign-source income. But this still leaves a lot of money that must be raised through other means. On the remainder Mr Obama sadly but predictably grows vague: curbing depreciation, the deductibility of interest, and the use of non-corporate business forms, such as “S corporations”, partnerships, and LLCs, should all be “considered”.
The single biggest corporate tax breaks are for depreciation and expensing of capital equipment, and a tax deduction for American-based production. But, awkwardly, among the greatest beneficiaries of these benefits are manufacturers whose cause Mr Obama now loudly champions. Rather than eliminate those tax breaks altogether, Mr Obama would preserve them for manufacturers so that their effective tax rate would drop a bit, to 25% from 26% currently. (The effective tax rate equals taxes, after all deductions, as a share of income. It’s a better measure of the tax burden than the top corporate rate.)
Mr Obama’s proposal is better than what America already has, but not by much. His well-intentioned goal of broadening the tax base is betrayed by the preferences he insists on maintaining for manufacturing and “green” energy whose economic merits have been questioned, even by former members of his own administration. By maintaining many of the current tax breaks but apportioning them more variably, the tax code would become more complex rather than less so…
Then there are the devilish politics. Marty Sullivan, an independent tax analyst, says high-technology and pharmaceutical multinationals such as Apple and Merck that have benefited from low taxes on foreign-source intellectual-property income would be losers, as would utilities and telecommunications companies with significant interest and depreciation charges. They are unlikely to accept a tax hike quietly.
Both of those sources point to the real reason why such proposals should not be taken seriously. No matter how well-intentioned the president might be, there isn’t a snowball’s chance in hell that what he proposes will actually happen. The moment such a bill gets submitted, the corporations who benefit from all those tax breaks he wants to eliminate will flood Congress with money to preserve their favored loopholes, tax breaks and subsidies. And most of them will succeed in doing so.
And remember, they have far more leverage now than they used to have — not because of Citizens United, which really didn’t change much, but because of the ruling in the Speech Now case, which is what allowed the Super PACs to flourish. A corporation, alone or in a group or through a trade organization like the Chamber of Commerce, can now walk in to a legislator’s office and say, “You’re going to make sure this provision is removed from the bill or we’ll be spending $10 million in your district in the next election to make sure you don’t get reelected.” And they can do it; hell, they do it all the time. And the pro-reform forces don’t have even a fraction of the money that the corporate beneficiaries of government largesse have.
That is what prevents genuine tax reform. It’s also what prevents all legislation from being considered on a rational basis. If we do not fix the problem of corporate influence in politics, we can fix almost no other serious problem facing the country.