Wednesday, February 22, 2012

Obama's Corporate Tax Plan

At 35%, the US has one of the world's highest corporate tax rates. We also have tax laws riddled with loopholes. The effective tax rate is closer to 25%. Some companies pay more, some pay less. Even that average is higher than the world average. Conservatives have been wanting to lower corporate taxes for some time. President Obama's deficit reduction panel also recommended lowering the tax rate and eliminating loopholes.

Today the White House rolled out a new tax proposal. Most loopholes would be eliminated and the corporate tax rate would be reduced to 28% except for manufacturers which would pay less and for oil and gas companies which would pay more. Where does this leave us?


The current effective rate is 25%. Obama wants to eliminate loopholes and reduce the tax rates, all in a revenue-neutral way. How did he come up with 28%? The quick answer is that he is not eliminating all loopholes. A couple of the biggest deductions would remain. Plus, he proposes some new loopholes. Manufacturers will pay a lower rate. Rick Santorum proposed something similar and fiscal conservatives had a fit.

By the way, the US is still the world's biggest manufacturer by a wide margin. Manufacturing jobs have been decreasing because the cost of labor was greater than the cost of automation.

President Obama wants to punish oil and gas companies. This might be a popular move since gas prices are up but these companies' earnings are not out of line. Their profits are around 6% of their sales. They sell a lot of gas and oil so they make a lot of money but Obama has more influence over the price of oil than they do. The current spike was caused by hostilities with Iran which were triggered by sanctions the Obama administration pushed through. Compare this with Apple which counts nearly 30% of its income as profit. Outside of populism, why tax one company higher than another?

Isn't it a little hypocritical for Obama to propose removing loopholes then make exceptions for industries that he does and does not approve of? It might even count as scary.

Apple takes its own hit. It currently has billions in earnings in foreign accounts. They cannot move these profits to the US without paying taxes on them. Obama wants to change this and tax money earned abroad. This would be unique for the industrialized world.

Obama's proposal has little chance of being considered this year which makes it nothing but a campaign document.

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