President Obama's corporate tax reform proposals win mostly positive marks from the conservative Manhattan Institute, because he offers "lower rates from a broader base" of business taxpayers, writes senior fellow Josh Barro. Still, Manhattan questions Obama's preference for manufacturing and renewable energy over other businesses, in this short report.
Highlights: Obama would:
- Cut the base corporate tax rate to 28%, from 35%. That "would make us more competitive; lost revenue can be offset by broadening the corporate tax base" to curb abuse of lower-taxed, small business-focused C-corporations and S-corporations by big companies.
- "Reduce distortions between debt and equity. Most corporate tax systems create incentives for firms to finance themselves with debt, but the American tax code is more distorting than most. Lowering the corporate tax rate reduces the tax penalty associated with equity financing." Barro also likes Obama's general suggestion to limit interest payment deductibility, which will also retard over-borrowing.
Manhattan's concerns and suggestions:
- Obama is picking favorites. His proposal to tax oil and gas profits more llike other industries (above the current effective 9% rate) makes sense (though it will likely result in higher fuel costs), but his proposal to extend the already large subsidies for wind and other renewable power will distort investment. Instead, "tax reform should eliminate subsidies for energy from all sources."
- Similarly, "President Obama’s reform plan includes a host of tax preferences designed to prefer domestic manufacturing over other industries," as Dow Chemical boss Andrew Liveris, DuPont boss Ellen Kullman and other visitors to the Obama White House have demanded, in exchange for expanding here instead of, say, China. Obama wants to expand the domestic production tax credit to stimulate factory hiring. But American factory production (if not hiring) is actually on the rise, Manhattan notes.
- Go easy on US multinationals. "The United States is already unusual in trying to tax the foreign income of companies based here—most advanced countries use a “territorial” tax system that applies only to economic activity within the taxing country... So long as this tax is set low enough that it only applies to tax havens like Bermuda, this proposal won’t be a problem. But attempts to tax the real foreign activities of U.S. firms in lower-tax jurisdictions like Ireland and Hong Kong would place U.S.-based firms at a major disadvantage compared to their foreign competitors."
In sum: "We should tax different types of economic activity equally and let capital be allocated where it can most efficiently be used."