Backed into a corner by Republican demands for severe spending restraints as a condition for an extension of the debt ceiling, President Obama has attached a few conditions of his own, among which are eliminating some corporate tax breaks for corporate jets, tax breaks for oil companies, and the like.
Critics have been quick to point out that these tax breaks are a pittance compared to the enormous spending cuts necessary to make a dent in our debt and deficit problems, and have concluded that these tax breaks were chosen by the president for their populist political appeal rather than for their deficit reduction potential.
So focusing about tax deductions for corporate jets is, in this context, an obfuscation of the real issue behind the debt ceiling debate—getting a grip on federal spending that is above and beyond realistic revenue projections.
But what about those tax breaks for corporate jets and oil companies?
The U.S has not only the highest corporate tax rate among developed countries, but the highest effective corporate tax rate as well. At least part of the reason why corporations are not investing and creating jobs despite sitting on mounds of cash is that the high corporate tax rate disincentivizes them from doing so—at least on U.S. shores.
Can our elected officials really expect U.S. corporations to compete globally despite being hamstrung by tax rates significantly higher than their international competitors?
In response to this problem, Washington has filled up the tax code with a patchwork of tax “breaks”—deductions for this, credits for that. Many of these tax breaks may seem indefensible when viewed in isolation, but viewing them in isolation is a mistake. They help U.S. corporations overcome the competitive disadvantage of our high corporate tax rate, helping them to compete globally. The result of eliminating these tax breaks in isolation would be to raise the effective corporate tax rate even higher than its already destructive level.
Eliminating tax breaks for corporations should only be done within the context of an overall reform of U.S. corporate taxation. Such a reform effort is long overdue and could have a major impact on economic growth in this country. But it’s highly unlikely that we’re going to have an overall reform of U.S. corporate taxation in time for the debt-ceiling deadline.
So let’s focus debt-ceiling talks on the real driver of debt and deficits—spending. Then, let’s take up the president’s challenge and reform our corporate tax code, eliminating credits and deductions and lowering the corporate tax rate so we can get on with the business of competing globally and creating jobs.
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Today's TaxByte was written by IPI President Tom Giovanetti