Economics

Why Obama Wants to Cut Corporate Taxes

Is the president serious about encouraging business?

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America doesn't feel much like the champion of the world these days. Everywhere we look, we see other countries outdoing us—in economic growth, educational performance, and men's soccer. But this year, we are expected to gain an impressive distinction: the highest corporate tax rate in the developed world.

I don't know about you, but it doesn't make me feel like chanting "USA! USA!" If high corporate taxes are a good policy, why are we the only ones embracing them?

This achievement, of course, may sound like just what you'd expect when you put a Democrat in the White House. Actually, the rate is the same now as it was under President George W. Bush. The reason we're about to ascend to the top rung is that Japan, which currently has a stiffer levy, has decided a reduction is in order.

During his speech Monday to the U.S. Chamber of Commerce, President Barack Obama couldn't suppress his chronic urge to lecture business people on their obligations, such as hiring more Americans and investing more.

But he did admit that the federal government is partly to blame for their reluctance.

More important, he proposed something that hasn't been done since the Reagan administration: cutting rates on corporate income taxes. Obama would take that step in tandem with streamlining the rules to broaden the tax base. "We need something smarter, something simpler, something fairer," Obama said, in words not calculated to inspire organized labor or his party's more liberal elements.

For that matter, it offers no obvious political advantage at all. Few Americans are haunted by the fear that corporations are paying an excessive share to the government. On the contrary, the corporate income tax is most people's idea of a perfect tax: one that doesn't cost them a cent.

But this is a destructive fantasy. In reality, the tax doesn't come exclusively out of the bonus packages of super-rich executives. It exacts a toll from just about all of us.

The problem for workers is that in a competitive world, corporations can manufacture goods in a multitude of places. With such a high rate on companies operating here, our tax entices them to move their operations to Mexico, China, Ireland or any number of other locales.

If you're a factory worker whose company finds it irresistible to relocate, you pay a painful price for the high corporate income tax.

Let's say, however, that the corporate income tax reduces the income of investors, many of whom are affluent. To some people, this may sound like a welcome blow for economic equity. But even if the tax works as intended, ordinary people are worse off.

By slashing the returns to capital, the tax discourages companies from investing in plants, equipment and technology. But it's those kinds of outlays that make workers and managers more productive. Higher productivity fosters higher wages by making each employee more valuable.

Less investment means lower wages in the long run. That helps explain why liberal economists don't like the corporate income tax any more than conservative ones do.

This levy is also not very good at its only legitimate purpose—raising revenue. Despite having a high rate—or because of it—we rank near the bottom in the amount of money collected.

One culprit is the long list of loopholes that let a lot of income escape the clutches of the IRS. Another reason is that if you're a multinational company, you will pay lawyers and accountants handsome sums to find ways to move your income to low-tax places and your expenses to high-tax places.

Martin Sullivan, a former economist at the Treasury Department and Congress' Joint Committee on Taxation, says this happens all the time. In five low-tax countries whose economies account for only 2 percent of world GDP (excluding the U.S.), U.S. multinationals reap 21 percent of their foreign profits.

This oddity, Sullivan testified recently before the House Ways and Means Committee, is the direct result of "perfectly legal but economically indefensible assignment of profits to subsidiaries in low-tax jurisdictions." The problem has only gotten worse as rates have come down abroad but not here.

The left of his party may demand to know if Obama wants to accommodate big business or stand up for the interests of workers. But who says we can't do both?

COPYRIGHT 2011 CREATORS SYNDICATE, INC.

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  1. That’s silly Chapman, everyone knows that the only way for the government to stimulate the economy is through redistribution of wealth from taxpayers to corporations. Hell, we need to raise corporate taxes so that they need us to give them even more money, and the multiplier effect will work everything out. Tom Friedman and Paul Krugman told me so.

  2. You’d almost think that Obama had visited Texas recently or somethin’.

    1. Would you be referring to the same Texas that’s currently looking to lose an Amazon.com warehouse because it’s bitching and moaning about not getting its owed sales taxes?

      People need to get over this media-fed lie that Texas is so great for business.

      1. Would you be referring to the same “media-fed lie” that Texas is so great for business that all the businesses that are pouring into Texas seem to be falling for?

  3. HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA!

  4. President Obama wants to cut corporate taxes because he knows, Citizens United aside, corporations don’t get a vote. Continuing corporate income tax is taxation without representation, and constitutional scholar Obama knows that is WRONG.

    1. That’s too funny…that stupid son-of-a-bitch knows nothing!

  5. What does Obama know about running a business or job creation? I’m still waiting for Green Jobs, Inc to start hiring.

    1. Hey, I managed a Presidential campaign. I think that proves I’m capable of running the world’s largest economy. And don’t tell me that’s not my job. Everything is my job.

      1. Everything is my job.

        BHO! BHO! BHO!

      2. Well, OK, I didn’t actually run my own campaign. But I do read the teleprompters all by myself!

        1. But I do read the teleprompters all by myself!

          Oh, come on, man!

          1. Yes, it was actually an Obama android who read the teleprompter.

            1. And a darn fine job he did of it, too! The way he adlibbed his way through his tax policy with all the human-esque verbal pauses like “uh uh uh hang on a minit! uh..” — he almost seemed human.

              Almost.

              1. “uh uh uh hang on a minit! uh..”

                Call Bangalore…reset the android.

                1. Wipro’s on line 2. Sajeev said he got the PHP script re-done and released the build.

                  Welcome to the new Web 2.0 world of Agile Obama.

  6. Methinks he’s getting ready for the election and he learned from the midterms

    1. Well, he never really stopped campaigning.

    2. Methinks he is doing the same thing he did in 2008 – telling people what they want to hear so he can get elected and do what he really wants to do, i.e. increase the amount of government in every aspect of our lives.

    3. Exactly and the dumb bastards in this country will probably reelect him.

      1. Do you mean the Reason writers? IIRC, they loved the big O

        1. Anybody who would vote for Obama.

      2. They probably will if the repubs nominate the Huckster, the Mitt, what’s his name from NY, nitwit Palin, or for that matter any other number of nitwits that seem to be coming out of the repub woodwork: Bolthead for instance…

        1. Stossel *might* be a viable option. He can spin a halfway-convincing argument to the social conservatives, and could pull in the social liberals who are ambivalent about economics. He could put the Libertarians behind the Republicans, due to his views.

          Thoughts?

          1. I don’t even think he’s viable in a parallel universe where money, political pedigree, and the ‘RPRT’ phenomenon didn’t factor as the qualifier for POTUS. Though, It would be interesting to see the skeletons in his closet

  7. Replacing the income tax with the Fair Tax cuts corporate taxes to zero. Plus it would replace tens of thousands of pages of the US tax code with only a few pages. The US would become the tax haven of the world.

    1. “We need something smarter, something simpler, something fairer.”

      Let me be clear.

      My statement most assuredly does not allude to the so-called “Fair Tax.” The American People can not afford to drive more lawyers and accountants into unemployment.

  8. I had no idea there were so many of me. What a wonderful world!

    1. Looks like I’ll be one well satisfied first lady tonight!

      1. There’s a first time for everything.

        1. You know cause you couldn’t satisfy her either? Ragin doesn’t mean what I thought it did 🙁

          1. Who says you could, you cunt pickler? Methinks you think way too highly of yourself. Eat your damn veggies and get over yourself! It ain’t all about you, girl!

    2. I’m not a witch.

      I’m you.

      1. Actually, I’d vote for a witch because they might know a thing or two about private enterprise and individual freedom.

        Just sayin’.

        1. And we’d finally have a leader worthy to lead our invasion of Romania?

          1. I would be ready for such an onslaught but my impaler has been irreparably pickled.

        2. Walking bathtubs are greener than the Prius.

  9. With such a high rate on companies operating here, our tax entices them to move their operations to Mexico, China, Ireland or any number of other locales.

    Actually, the corporate tax rate in Mexico is quite steep (not as high as America’s, but still…)

    What makes Mexico more inviting is the lower wage and higher skill levels of the labor force. Most laborers in Mexico have finished secondary school (except maybe construction peons and small farmers, but still…)

    What makes Mexico LESS inviting sometimes is the fact that corporate managers have to live in veritable fortresses (which we would call “gated communities”) to avoid being the victims of kidnapping!

    But stil….

  10. By slashing the returns to capital, the tax discourages companies from investing in plants, equipment and technology.

    Uh, not only that – CapEx money just for simple major MAINTENANCE jobs is hard to come by these days, let alone investments in new equipment or technology. It’s the 30s all over again, gang!!!

    1. But Stil…

  11. America doesn’t feel much like the champion of the world these days. Everywhere we look, we see other countries outdoing us?in economic growth, educational performance, and men’s soccer.

    That last one is reassuring. When we get to the point that we’re worried about how we are doing at soccer and actually start to try at it, then we know we are in trouble.

    1. Nothing a big fat government subsidy can’t fix! Let’s throw money at soccer! JOB CREATION!

    2. You would think our so called world leader would know it is called Football, Futbal, and sometimes Footy (though that name usually implies Rugby) outside of the US. Well except for Japan as they inter-change soccer and football, but why nit-pick.

  12. “”We need something smarter, something simpler, something fairer,” Obama said, in words not calculated to inspire organized labor or his party’s more liberal elements.”

    I’m not sure why organized labor would not be inspired. Big Labor in the private has a symbiotic relationship with large corporations. If their hosts are unhealthy how do the unions survive?

    1. See GM

      1. Or basically any parasite. All diseases count as parasites. So do tapeworms.

        And yes, I think it’s fair to use “parasites” to describe most unions. All they do try to milk the employer for all its worth and then go into a tizzy when it fails on them.

    2. This would make a great departure speech Jan. 20th, 2013 as he takes his stupid, lying, crooked ass back to Chicago

  13. “If their hosts are unhealthy how do the unions survive?”

    Come on. Everybody knpow this. They lobby for government takeover of the business giving the union a large chunk of stock leaving pennies on the dollars to the secured bondholders.

    1. knows too!!!!!!!

      1. Kapow also!!!!

        1. Geez, Batman, you know everything!

        2. Hey Batman, I always wanted to know what you thought?

          1. I thought, man, it would be great to bone that bitch!

  14. How come the hairy dead beaver on Rand Paul’s head, that I see everyday here on Reason’s home page reminds me of my ex-wife?

    1. For fucks sake, if you gave your wife’s beaver mouth-to-mouth it would have survived-have you no compassion Sir?

      1. Maybe she would rather let it die.

  15. Forget the rate, what about the brackets? They haven’t been altered to account for inflation since the mid 1970s.

    1. Brackets? What does March Maddness have to do with taxes?

      1. Since we were talking about corporate taxes, you might have concluded that “brackets” referred to “corporate tax brackets”.

  16. Neat accounting trick with SarbOx and corporate taxes:

    1. Company makes $100 million in cash.
    2. Corporate tax rate is 35% = $35m.
    3. Company prints million options.
    4. Company hands out options to MBA’s
    5. Spread on options = $100 million.
    6. With SarbOx…must ‘account’ for that difference as a cost of dilution to other shareholders. But you never actually hand out any cash to the sucker-shareholders. You just book it as a ‘cost.’
    7. Now Company shows ‘$0’ made on 10-K.
    8. Company keeps $100m, pays no taxes.
    9. Shareholders get screwed.
    10. Suits hand out $100m in essentially money they printed for themselves, at cap-gain rates.

    Gotta love unintended consequences.

    1. “Gotta love unintended consequences.”

      Are you sure they were unintended?

      1. Good point.

    2. Are you sure it works that way? A 10K is not a tax return. There are numerous differences between 10K accounting and IRS accounting, most of which are material enough to require public disclosure. Straightlining of rents, for example. A public company’s Form 1065 must use IRS accounting, not 10K accounting.

  17. Never judge Obama by what he says, judge him by what he DOES.

  18. I’d be more in favor of making dividends deductable. Or at least X% of dividends deductable if thats the best we can do. Think it would have long term beneficial effects on our capital structure.

  19. Why not make 100% of dividends deductible, like REITs have? That would really put into stark relief the choice corporate managers make between keeping cash in house or paying it as a dividend.

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  21. Unique opinion. Believe that Obama has a mind of its own. Support him.

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  24. Good article,but I think the real reason is not what you say

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