Thursday, December 13, 2012
Reaching an agreement to cut the corporate tax rate should be easy. Major figures from both political parties have expressed interest in reducing the tax from 35%, which is the highest rate among the country’s main trading partners. Corporations would generally benefit from paying less tax and having more cash to reinvest in new projects or pay in dividends to shareholders.
The 35% rate is more of a “sticker price” than a reflection of the average tax burden. Corporations can pay a lower rate by lobbying for special deductions and credits, employing aggressive transfer pricing strategies to shift profits offshore and structuring operations to minimize how much they pay in taxes in the United States.
The average effective corporate tax rate is around 20%, and even lower in some industries. Cutting the nominal rate to 25% while broadening the base would discourage wasteful tax planning and, some believe, would make United States-based multinationals more competitive. But the politics of changing the rate and eliminating loopholes are thorny. Not everyone benefits. ...
A final tax package is likely to include many things other than a simple reduction in the corporate tax rate. Congress may offer special deductions and credits to soften the blow for companies that take a big charge to earnings or lose a competitive advantage.
The policy argument for these sweeteners is especially weak. Usually, when companies strive for a competitive advantage by offering superior service or building a better mousetrap, we all benefit. But when companies gain an advantage by aggressively managing their tax liability, they benefit only themselves and shift the burden to others.
Changing the tax code is never easy. Cutting the corporate tax rate provides a rare opportunity for bipartisan lawmaking. Congress shouldn’t make it harder on itself by promising to hold harmless every company that has manipulated the status quo to its advantage.