NCPA - National Center for Policy Analysis

An Irrational Tax Bill?

November 20, 2003

With Europe threatening to impose $4 billion in tariffs on all products, Congress is rushing to fix the corporate tax code by late this year. However, the cure may be worse than the disease, says Fortune's Jeffrey Birnbaum.

To circumvent rules prohibiting countries from explicitly subsidizing exporters, Congress has devised a new, low income-tax rate for all manufacturers, which includes most exporters. The leading version would slowly cut the tax on manufacturing income to 32 percent, leaving the rate for other businesses at 35 percent. But, under the new law:

  • Many companies are likely to start contorting their balance sheets, mostly by shifting expenses to the non-manufacturing part of their business and then listing as much income as they can in their manufacturing divisions.
  • To please constituents, tax writers are considering letting all sorts of groups (farmers, engineering and construction firms, oil refiners, natural gas producers, soft-lumber harvesters, and moviemakers) qualify for the new rate as well.

Gamesmanship and tax sheltering of this kind led Canada to repeal its own low-rate system for manufacturers last year, says Birnbaum. A better option, he explains, would be to repeal the current subsidy and use the savings to lower either the budget deficit or taxes for all corporations.

Source: Jeffrey Birnbaum , "An Irrational Tax Bill? No Way!: A Special Tax Break?" Fortune, November 10, 2003. For text


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