Washington is beginning to buzz about a reported push by the White House and Treasury Secretary Timothy Geithner to reform corporation taxation.
According to Politico, the plan is to lower the top corporate marginal tax rate from its current 35 percent to something possibly as low as 26 percent. The reduction in marginal rates would be “paid for” by removing “loopholes” and “exemptions.”
Bear in mind that because something is described as a “loophole” or an “exemption” doesn’t mean that it’s bad or improper. Many of these supposed loopholes and exemptions-- things like accelerated depreciation, tax deductions for domestic manufacturing, and the R&D tax credit--are actually very important and necessary policy elements intended to mitigate the harmful effects of having a 35 percent marginal tax rate—the highest corporate tax rate in the industrialized world.
But, in principle, it’s not a bad idea to simplify the corporate tax code by removing exemptions and deductions and paying for it by lowering the marginal tax rate. But that’s tax simplification—and simplification simply isn’t enough.
According to Jack Mintz of the University of Calgary, the United States has the highest effective tax rate on corporate capital in the industrialized world—34.6 percent, which compares to an average of just 18.6 percent for OECD countries. So it’s not just our statutory corporate tax rate that is out-of-line with our international competitors—it’s our effective rate as well.
This suggests that if corporate tax reform is a “revenue neutral” swap of exemptions, deductions and credits in exchange for a lower statutory rate, that in itself won’t be enough to stimulate the kind of added corporate investment we need to jump-start our economy and enhance our global competitiveness.
Businesses will appreciate tax simplicity, but businesses make their decisions based on the after-tax return to their investments. Corporate tax reform that’s worth the effort—that encourages investment and job creation in the United States, and that enhances our global competitiveness—must increase the after-tax return to corporate capital by reducing the effective corporate tax rate.
In other words, a tax cut.
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This TaxByte was written by IPI President Tom Giovanetti.