The Inconsistencies of the Obama Corporate Tax Plan

March 7, 2012

In his latest proposals for a reformed corporate tax system, President Obama stated his goals of lowering rates, removing tax expenditures and loopholes, and eliminating bad incentives.  However, the specifics of his proposals often fall out of line with these admirable principles, says Josh Barro, a senior fellow with the Manhattan Institute.

  • The president will expand subsidies for renewable energy, which already receive support amounting to $584 per billion British Thermal Units (BTU), compared with $63 per billion BTUs for oil and gas producers, according to Deputy Assistant Secretary for Environment and Energy at the U.S. Treasury Gilbert Metcalf.
  • The plan fails to remove substantial subsidies for domestic manufacturing and actually moves in the opposite direction by expanding them.
  • The tax proposal includes further effort to tax foreign activities of American multinational businesses, placing American tax policy further at odds with the tax systems of the rest of the developed world.

These three specific poor decisions, and numerous others like them, demonstrate the president's unwillingness to stand by his stated principles of taxation.  Nevertheless, the president's proposals included several that would positively reform the tax structure.

  • The United States should cut the corporate tax rate from 35 percent to 28 percent, as this would help American firms to be able to compete against foreign firms.
  • Tax reform would help balance the incentive to finance businesses through debt instead of equity.
  • Businesses should be limited from reducing their tax burden by self-identifying as an S-corporation when this is inaccurate -- reform would create a stronger delineation between true S-corporations and traditional C-corporations.

An effort to remove the aforementioned protectionist tendencies within the tax proposal would improve its attractiveness and increase its revenue potential.  Furthermore, it would help create a balanced playing field among industry competitors by further broadening the tax base.

Source: Josh Barro, "The Inconsistencies of the Obama Corporate Tax Plan," Manhattan Institute, February 2012.

For text:

http://www.manhattan-institute.org/pdf/ir_3.pdf

 

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