A defining characteristic of an individual income tax system is its degree of progressivity. The United States has a rather progressive income tax. This means that the average tax rate paid by an individual increases as...
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- A Few Contradictions in President Obama’s State of the ...
A Few Contradictions in President Obama’s State of the Union Address
Last night, the President said this about corporate tax reform:
“Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad. Let’s flip that equation. Let’s work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.”
If his corporate tax proposal looks anything like what he and other politicians have proposed in the past, his plan will likely lower the corporate income tax rate from 35 percent to around 28 percent. On top of that, his plan to close “loopholes” will undoubtedly lengthen depreciation schedules, overstating corporate taxable income, making capital investment more expensive in order to raise revenue.
This corporate tax plan contradicts the goals of other proposals he had in his address, especially those dealing with manufacturing and small businesses.
First, he wants “to beat other countries in the race for the next wave of high-tech manufacturing jobs.”
Unfortunately, his corporate tax plan will actually lead to slower development of the manufacturing industry in the United States. Manufacturing, a capital intensive industry, would be disproportionately hit by a corporate tax plan that would increase the cost of investing in new capital. His plan would pay for a lower tax rate for retailers, banks, and consultants, by increasing the burden on manufacturers.
Later, he mentioned that he wants to “do more to help the entrepreneurs and small business owners who create most new jobs in America” through more small business loans.
His corporate tax plan may counteract any benefits of a small business loan program. A plan that “closes loopholes” for a lower corporate tax rate, will leave the millions of businesses who pay through the individual income tax behind, many of which are small businesses. These businesses will suffer from overstated taxable incomes due to the closure of "loopholes," but won’t benefit from the corporate rate cut. As a result, the 30 million businesses, or 54 percent of business income, that are taxed through the individual income tax (at a top rate of 48 percent) would be subjected to higher taxes, while traditional c-corporations would face a lower rate. This would adversely affect small businesses, the very businesses the President wishes to help.
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