Obama’s Grand Bargain a Roundabout Way to Raise Corporate Taxes

July 31, 2013

President Obama’s “Grand Bargain” announced yesterday would lower the corporate tax rate to 28 percent, but raise corporate taxes in other ways such that the total package would raise revenue to pay for various stimulus programs. The main revenue raiser would be a minimum tax on foreign earnings, although it is unclear how that would work. What is clear is that this proposal would leave the U.S. even less competitive than before.

First, lowering the corporate rate to 28 percent would be a step in the right direction but even that would not make us “globally competitive” as the president claims. The U.S. currently has the highest corporate tax rate in the developed world, at 39.1 percent, including a 35 percent federal rate and another 6.3 percent from the states on average. Lowering the federal rate to 28 percent would leave the U.S. with a total corporate rate of 32.5 percent, which is still the fourth highest in the OECD (see the chart below). Japan would have the highest corporate rate but not for long as the ruling party has plans for a “bold reduction of corporate taxes”, which would leave the U.S. competitive with only France and Belgium. Portugal currently has a rate of 31.5 percent but they are considering lowering their rate to 17 percent.

Second, “paying” for this lower corporate tax rate with a minimum tax on foreign earnings is going the opposite direction of our trading partners, who have largely opted to exempt foreign earnings with a territorial tax system. The chart below shows there are only 5 other developed countries that still tax foreign earnings on a worldwide basis like the U.S., and those countries have much lower corporate tax rates. If the proposal is to essentially end deferral, or apply a minimum tax to deferred foreign income, international experience with this clearly points to it harming foreign investment and the domestic economy.

Essentially, even a 28 percent federal rate, while continuing to tax on a worldwide basis, would not be competitive with any developed country. Adding a minimum tax on foreign earnings only makes it worse.

Follow William McBride on Twitter @EconoWill

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