Why Obama Wants to Cut Corporate Taxes

Is the president serious about encouraging business?


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?