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  • Corporate Tax Reform Should Focus on Rate Reduction

    The United States will soon have the highest corporate tax rate in the world once Japan enacts its pledge to cut its rate. This dishonorable distinction is driving both Washington lawmakers and the business community to finally call for long-overdue reform.

    Politico reports that Treasury Secretary Timothy Geithner will release the Obama Administration’s plan for corporate tax reform in the coming weeks. There are many outlines the plan could take, because there are so many problems with the corporate tax code that need fixing. But no matter what form the plan takes, its centerpiece should be a greatly reduced rate.

    The high rate is the biggest factor driving businesses to locate new investment in other, more competitive countries. This is costing the U.S. jobs and slowing economic growth.

    The Administration’s plan should lower the corporate tax rate so it is on par with the average in other industrialized nations in the Organization for Economic Cooperation and Development to put the U.S. on equal footing with its global competitors. That average stands at 25 percent today, well below the U.S. rate, which is above 39 percent (35 percent at the federal level plus the almost 5 percent on average that states tax businesses).

    Lowering the rate reduces tax revenue, according to the budget rules directing Congress. That’s why the Administration’s plan will likely offer a lower rate coupled with an expanded tax base by eliminating certain deductions and credits (what many refer to as “closing loopholes”) to make up for any revenue lost through the rate cut.

    This is where reform gets both tricky and dangerous. If the plan rids the tax code of the wrong provisions, it could end up doing more harm than good—even with a reduced rate.

    The most damaging “loopholes” to close would be any provisions that allow businesses to deduct the cost of capital purchases faster than the cumbersome depreciation system in place now. Such provisions are not loopholes and are an important part of sound tax policy.

    Proper tax treatment for capital purchases would allow all businesses to fully deduct the costs of those expenditures when they occur. Our depreciation system raises the cost of capital for businesses, which hampers wage increases and job creation. The Administration’s plan should leave in place provisions that move the tax code away from the depreciation system. Ideally, the plan would also include full expensing for all businesses.

    With deficits of the magnitude that President Obama has called for in his budget, there will be pressure to use this corporate tax reform effort to raise more revenue. The plan will be a tax increase if would raise more revenue than the current tax code would if left in place. Congress should not be tricked into accepting a tax increase for a lower rate.

    Tax hikes are not the right solution to reduce the deficit. The deficit is a result of Congress spending too much, not taxing us too little. If the plan submitted by Geithner raises revenue, Congress should fix this by lowering the rate to ensure that America’s businesses don’t have their taxes raised.

    Posted in Economics [slideshow_deploy]

    6 Responses to Corporate Tax Reform Should Focus on Rate Reduction

    1. AWM -NW Indiana says:

      Abandon ALL deductions; bring the code to a single page; collect upon transaction; and in doing so, bring real justice to the process.

      We are hastening the collapse of this nation, by allowing a tax system wherein less than half of the populace has "skin in the game"!

      And it is simply shameless when our small/mid business pays more in federal tax than corporations thousands of times our size, by gaming the system (GE…..)

      • Bill Jacky says:

        Outline to the world where GE, Verizon and other large companies avoid paying taxes at all, while small business is taxed at up to 35%. Why? I want to know!

    2. Bob W Maine says:

      There needs to be a means of reducing the record keeping burden on all businesses. My family's small business has record keeping costs & time spent on tax preparation far more than the small business's tax liability. We have eliminated 2 jobs that were difficult to justify based on taxes, record keeping and other government requirements….we make up the difference by the family working more, and not making more money.

      We have really looked at the Fair Tax very carefully and completely and believe it is the answer to our problems….NO RECORD KEEPING or filing of any tax returns!

    3. William Hoy says:

      Close the loopholes that allow corporations to launder funds overseas. Lower the corporate rate from one of the world's highest (35%) to the world's average (about 15%) and raise the personal rate on wealthy individuals. More money will be paid out as dividends. It'll be easier to keep an eye on individuals. Better yet replace the whole corrupt tax code with a VAT. Exempt unprepared food, medical expenses, etc. Refund the tax to those below the poverty line. let the rate be higher on things like luxury cars, yachts, etc.

    4. Pete, Houston Texas says:

      We are missing the part about what is actually paid vs the tax rate and where are we when we look at it that way. While the rate maybe 39% what is the rate that on average american businesses are paying. Then look at other countries and their tax rates and what are they actually paying. Seems that we need to remove the basic loopholes and credits and simplify the system and then reduce the rate as well. Will put alot of lawyers and accountants out of business and more focus can go into produce products that generate jobs vs jobs that do not add to productivity. Would also take away money from the lobbyists and politicians that do not generate jobs but are part of the overhead and corruption of the system of buying favors.

    5. John Bruner, Davison says:

      Just wondering if anyone is really tuned into the facts. I constantly hear Sean Hannity and others giving argument to fair and open markets. That it is OK for large corporations to pay workers low wages in the range of $10 to $12 dollars per hour. Most of the people doing these "medial" jobs have families and are, at least, 40 hour per week workers.

      A true conservative finds this to be unacceptable, here is why. Being that any of these workers will have families and just making less than 50k per year in most States qualifies their children for free lunch programs in public schools – paid by the taxpayer. At $12 dollars per hour is 24k per year and in most States that qualifies for assistance and food stamp programs and medicade. Seems to me that by paying such low wages these corporations are having their labor work force subsidized by the taxpayer.

      I ask – HOW CAN THAT BE CONSERVATIVE ?

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