Today, President Obama unveiled a plan to cut the corporate tax rate from its current level of 35 percent to 28 percent while eliminating deductions and loopholes with the aim of raising $250 billion of additional revenue over the next ten years.
On its face, this sounds like a sensible proposal designed to please both Democrats and Republicans, and as a piece of election year politicking, it must be acknowledged as pretty clever. Republicans always support cutting tax rates, and Democrats always support raising tax revenues. Everybody wins. However, like everything this president does, there is more to the proposal than meets the eye, and we should be cautious before embracing it as a Clinton-style compromise for the sake of practicality.
The first point is that, while reductions in the corporate tax rate are absolutely necessary, the proposed cut is too small to make much of a difference in terms of international competition. The proposed rate of 28 percent is still higher than that of the most of Europe, including the Scandinavian countries so frequently praised by liberals and the United Kingdom, as well as China and Russia. Thus, the seven percentage-point cut will not substantially improve our attractiveness as a place of business over our chief competitors abroad.
This would not be so bad, and the proposal would probably still be worth acting upon, were it not for the other, slipperier bit of tax law folded into the president’s plan: a minimum tax on corporate income earned overseas. Ostensibly, this is intended as an incentive for international corporations to repatriate their profits in order to avoid the tax, which will then create jobs here at home. And even if they fail to do so, there will be more revenue for the government to use for deficit reduction.
It sounds good, but it’s important to remember that incentives like these cut both ways. If an American company with operations in multiple countries is going to be penalized by the U.S., it might make more sense for them to shift their base of operations to a country with a more lenient tax code, or even withdraw from the U.S. entirely.
It’s impossible to foresee the exact effects of such a tax, but it’s just as easy to imagine it hurting the American economy than to paint the rosy picture of job growth offered by the Obama Administration.
If the president is serious about creating jobs and increasing our country’s ability to compete internationally, he should be asking for a drastic cut in the corporate tax rate unaccompanied by sneaky new taxes with unpredictable effects. The effect on the economy of creating an atmosphere universally perceived as favorable to business would far outstrip any of minor gains hoped to result from minor tweaks such as this one. In any case, it’s clear that today’s announcement was calculated to win votes, not to create jobs.