By Clay Wyatt
President Obama has announced a proposal to reduce the highest corporate tax rate to 28 percent. This would be down from 35 percent, which is the second highest rate in the industrialized world.
While this may seem like good news for the lower-tax crowd, there is a major caveat. Obama seeks to end loopholes and subsidies that allow corporations to minimize their taxes. Also, he seeks to end Bush-era tax breaks for individuals who make over $200,000 and hopes to impose a minimum 30 percent tax on millionaires. Additionally, Obama calls for a minimum tax on foreign earnings – a move that will ruffle some feathers in the world of multinational corporations.
Obama’s proposal is likely to have been generated, at least in part, to the upcoming Presidential election. Current Republican
frontrunner Mitt Romney has called for a cut in the corporate tax rate from 35 to 25 percent, edging out Obama’s plan by 3 percent. Other contenders go even further, as Rick Santorum has suggested a 17.5 percent corporate tax rate with a total exemption for manufacturers. Ron Paul calls for a 15 percent corporate tax rate and Newt Gingrich calls for a 12.5 percent rate.
Of course, with Michigan – a state with a battered manufacturing sector – set to hold its Republican Primary on February 28th, the Republican candidates are likely posturing for success in the state. Similarly, Obama is likely trying to remain competitive with his potential rivals. Lower corporate taxes would encourage companies to set up shop in the US (or keep them here) and the candidates are certainly trying to cash in on that fact.
Effects on US Competitiveness
The United States currently has the largest economy in the world. However, China is closing in fast and is expected to take the driver’s seat in 2016. If that news is not bad enough, most other countries have reduced their corporate tax rates since 2000.
However, when combining state and Federal income taxes, the US has held steady at 39 percent – 13 percent higher than the average of 26 percent. A move down to 25 percent at the Federal level would match the US evenly with China, which
also has a 25 percent corporate tax rate. Thus, a more competitive tax rate – combined with rising wages in China and falling
wages in the US – will help the US remain competitive with China in the global economy.
Would This Be a Good Move?
Taxation is an issue that can stir up plenty of emotions. Some believe that high taxes are necessary to pay for social programs and to help the poor. Others feel that taxes are absorbed by greedy politicians for nefarious reasons.
Whatever your stance may be, this move would increase US economic competitiveness. It may not be ideal, but lowering corporate taxes would give businesses more reason to operate in the United States. The primary goal of just about any business is to make a profit – and they’d get to keep more of it with a lower tax rate.