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Corporate-Tax Reform — or Just Changes?



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President Obama will unveil his long-delayed corporate income tax reform just before noon today.  As someone who has been critical of the administration’s failure to provide specifics on tax reform, entitlement reform, stabilizing the debt — well, anything of any real importance to America’s future — it is a welcome moment.  Credit where credit is due.

But will it be tax reform or just another bad tax code?  The details are not yet out, but I am beginning to worry.  Start with the top line: a reduction in the tax rate to 28 percent.  Obviously, 28 is better than 35.  But 28 is not internationally competitive — to achieve that would require a rate of 25 percent or lower.  And 28 means that a C corporation will face a lower rate than a pass-through entity (sole-proprietor, partnership, etc.) which is a purely wasteful incentive for dentists, doctors, and maybe even economists to incorporate, put their families on the payroll, and otherwise game the tax system. 

The lesson is that you cannot do corporate reform in isolation and the president is dead-set against individual reform — his proposals consist exclusively of targeted tax increases. 

Now consider the new minimum tax on foreign earnings of global companies.  Is this really new?  No.  We currently tax the worldwide earnings of global companies (albeit with deferral of some tax until the money is brought back to the U.S.).  This has put the U.S. out of step with every major economic competitor.  (For a full discussion, see here.) The president’s own fiscal-reform commission recommended moving away from this archaic approach.  Consistent with his track record of ignoring all things Bowles-Simpson, the president is moving in the wrong direction. 

This is just another way to collect a damaging, anti-competitive tax; not reform.

The other headline leak is a special tax regime for manufacturers.  But, aha! There is already a special deduction for manufacturers, which does not seem to have created the goods-producing nirvana the president desires.  And it raises the question of why one would want such a provision.  After all, it provides a huge incentive to get classified as manufacturing (McDonalds qualifies for the current deduction) — which leads to the type of lobbying and policy corruption that the president decries.

So, a new policy misstep dressed up in Jimmy Choos.  Really?

I hope I’m wrong — I am a lot — but I expect to be underwhelmed at 11:30.



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