President Obama's "Anti-Tax Reform" Plan

February 23, 2012

As we wrote yesterday, the Obama administration should be given credit for recognizing that the U.S. corporate tax system is out of step with the rest of the world and their plan to cut the rate from 35 percent to 28 percent would represent a good first step toward making the U.S. more competitive.

That said, the rest of their plan uses the tax code to promote a mercantilist and isolationist view of the U.S.'s place in the global economy. The administration is clearly distrustful of companies that do business abroad and has the mistaken notion that America can compete for the 85 percent of global business that is outside of the U.S. from the safety of our shores. Thus the plan would increase taxes on U.S. multinational companies as a means of paying for the lower corporate tax rate which will largely benefit domestic companies.

On that note, it seems very unfair that foreign companies doing business in this country would get a 20 percent tax cut but U.S. companies doing business abroad would get a tax increase. How does that help U.S. competitiveness?

Also, it is ironic that Obama is proposing a 20 percent tax cut for corporations just weeks after proposing a "Buffett rule" for high-income individual taxpayers, many of whom are pass-through businesses such as S-corporations and LLCs. Interestingly, the top corporate tax rate and the top individual tax rate are at the same level - 35 percent - for the first time in the history of the U.S. tax system. I thank that parity should be maintained, but under Obama policies we would have a 28 percent corporate tax rate and a top individual of at least 39.6 percent. Thus you would see an exodus of S-corporations flipping to C-corp status.  

The administration has appointed itself the global tax cop to "help end the race to the bottom in corporate tax rates" -- despite the fact that over 75 countries have cut their corporate tax rates over the past five years, including our largest trading partners Canada, Japan, and the United Kingdom. The administration's proposed global "minimum tax" is a bit like Neiman Marcus declaring itself the last stop against the growth of discount retailers such as Target, Walmart and, now J.C. Penny.

The plan creates a new 25 percent tax rate for manufacturing - perhaps, even a lower rate for "advanced" manufacturing.  We can only imagine the feeding frenzy this would generate from lobbyists to get their industry declared manufacturing. As it is, the current "199" manufacturing deduction that was enacted in 2004, is available to architects, companies that grind hamburger, software firms, and companies that produce rap albums.

Lastly, while decrying the unfair "loopholes" in the corporate tax code, the administration is proposing a new Earned Income Tax Credit for renewable energy companies. According to the administration, renewable energy companies that are unprofitable and, thus, have no taxable income, have had to restructure themselves in order to take advantage of the current renewable production and investment credits. To remedy this, they propose making the permanent production credit "refundable" to unprofitable companies. Meaning, the IRS will cut them a check even though they don't pay income taxes, just as it does for individuals who get the EITC.

The bottom line is that Obama's corporate tax plan is the "anti-tax reform" plan. It will simply make the tax code more complex and its overall effects will largely undermine whatever benefits it delivers from a lower 28 percent corporate rate.

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