Obama Corporate Tax Plan: Lots of Pain for Little Gain

The administration has released its much awaited corporate tax reform plan that would cut the federal corporate tax rate to 28 percent from 35 percent while eliminating a host of corporate tax preferences.

The administration should be given credit for recognizing how our high corporate tax rate is undermining U.S. competitiveness, but their proposed 28 percent rate does not move the charts in terms of improved competitiveness.

Indeed, as the table below indicates, were the Obama plan enacted this year, the U.S. corporate tax rate would go from being the highest overall rate to 4th highest, after Japan, France, and Belgium.

While the 28 percent rate sounds like a big cut from 35 percent, we need to remember that when the roughly 6.4 percent average state rate is added to the federal rate (and adjusted for federal deductibility) the new overall U.S. rate would be 32.6 percent, down from the current rate of 39.2 percent.

Let’s not forget that none of these changes are happening in a vacuum. On January 1st of this year, the Canadian corporate rate fell to 15 percent from 16.5 percent and the British corporate rate fell to 25 percent from 26 percent. And, as is well known, Japan will cut their overall rate to 38.01 percent from over 40 percent on April 1st. (The table below accounts for the new Japanese rate).

The simple average rate of OECD nations is 25 percent, so the president’s rate cut falls far short of getting the U.S. back in the game. This sort of tax reform is less than “bold,” and less than competitive.