America / Economy / Politics / Tax

Corporate Tax Reform: No Longer Revenue-Neutral

Last Tuesday, President Obama delivered a speech in Chattanooga, Tennessee, outlining his long awaited corporate tax reform. The speech called for a revenue-neutral corporate tax reform that lowers the top corporate tax from 35% to 28% for the majority of businesses. Manufacturers’ tax rate will top-out at 25%. President Obama made a statement that the current tax code is complex and broken; smaller businesses usually end up paying a tax rate up to 35%, while larger ones are able to use loopholes and pay virtually no taxes what so ever.  This is the reason Obama is pushing for revenue-neutral business tax reform: a revenue-neutral tax reform plan could help eliminate loopholes that incentivize companies to outsource jobs overseas, as well as establish a top tax rate of 28%.

The White House released a fact sheet on Obama’s speech which goes into further detail about how and what a tax code reform can accomplish.  First is to simplify tax filing and add more incentives to invest in small business. Many believe that tax reforms should make tax filing simpler for smaller businesses.  Obama has proposed to allow businesses to expense an excess of $1 million in investments. This will provide more incentive to invest in new equipment and plants, while removing some complexity in the tax code. In order to ensure that ever company helps pay in, a minimum tax on foreign earnings has been put forward, as well as attempt to bring foreign jobs back to the U.S. This will hopefully remove incentives on to outsource jobs overseas or attempt to ship profits abroad.  More importantly, by lowering corporate taxes, the additional revenue would be used to help create jobs for the middle class.

So, why would lowering corporate tax rates increase revenue for job creation? Forbes released an article, which explained that along with a tax rate reduction, Obama is planning to widen the tax base by eliminating many of the preferences and deductions available under today’s law. The total effect of the two changes would result in an increase in total tax revenues received.

Now, while this sounds like a good deal, many have questioned if Obama would be able to uphold one of the more important parts of this reform, being revenue neutral. On Thursday, Senate Minority Leader Mitch McConnell mentioned that the idea of tax reform was all but dead in the current session of Congress. The insistence of the Senate Democrats and President Obama on raising revenue has been stunting the attempt to simplify the current tax code. Mitch McConnell said, “It’s pretty clear that the president has even walked away now from the commitment he made to us at lunch that corporate tax reform would be revenue-neutral.”

So in short, President Obama has good intention with trying to reform the corporate tax codes currently in effect. The issue is that since it is not entirely revenue neutral, it can end up doing just as much harm as it does good. It will also be very difficult to get legislation to pass which would place a penalty on thousands of companies for outsourcing jobs overseas. While the concept and ideas of the tax reform aren’t bad ones, how they end up affecting business needs to be reconsidered.