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Enough already?

April 5, 2012
Proposal for corporate tax reform misses the point
Robert Brooks

Last summer, one of the Presidential candidates riled a crowd when he asserted: “Corporations are people. Everything corporations earn ultimately goes to the people. Where do you think it goes? Whose pockets? People’s pockets.” It was an awkward moment for Gov. Romney during a campaign cycle that already seems too mired in debates about who is deserving of empathy and rewards, and who is deserving of blame and punishment. It happens that the law generally does view corporations and individuals equally, but portraying businesses as villains is a political tenet as old as the Republic. Remember the East India Co.?

In any case, the notion that corporations support people is becoming less true all the time, because, first, corporations must support the government. As of April 1, the United States has the world’s highest corporate tax rate. Famously corporatist Japan has cut its corporate tax rate, so the 39.2% rate (federal and state) that U.S. corporations pay is more than their counterparts pay anywhere else in the world. Resentful voters may not see the problem in this, but it is the first issue to be addressed by any candidate who claims to want domestic corporations to be globally competitive.

The reason for this is that, whether you believe they are evil or not, corporations are simply the best means of initiating economic growth: individuals don’t have the nerve, the stamina, nor obviously the resources to make growth happen on the scale needed to drive a global economic economy. And, try as they might, federal officials don’t have the instincts, the reflexes, the accountability, or the oversight to make sure that spending is done efficiently or fairly. We have seen the haphazard effectiveness of federal stimulus programs, and the questionable record of targeted investments in, for example, the energy sector, where dreamy ideas of green power devolved into predictable schemes of influence peddling and ultimately bankruptcy.

Earlier this year the Obama Administration proposed a corporate tax reform program that appeared to be a negotiating position: 1) reduce the federal corporate tax rate to 28%, generally acknowledging the position that almost all elected officials take when appealing to their business constituents (Romney, for comparison, proposes lowering the federal corporate tax to 25%); and 2) eliminate various tax credits and deductions.

Keep in mind, however, that this corporate tax restructuring is proposed as a plan that would happen within the Administration’s broader tax program, which anticipates that existing taxes on capital gains will increase, leaving higher taxes on investment earnings than are levied by any other OECD or BRIC country. The point is that the federal government has the authority to encourage greater levels of investment that would promote economic growth, but it wants its own cut off the top. It’s not that the feds are anti-business, but they appear to be anti-capital.

Perhaps it is this bias against investment that makes the government so maladroit at structuring programs that drive economic growth. Even allowing for the good intentions of the proposed corporate tax revision, its impact is likely to be negligible. The lower rate may promote some new investment, but this is offset by rescinding so many deductions and credits that most corporations are likely to see their tax burden rise.

This points to a second problem with the tax system that would not be improved: the impulse of government officials to reward some companies or industries with tax breaks. The Administration’s proposal increases tax credits and subsidies for manufacturing and renewable energy, which is just a continuation of the current system for handing out favors. A common, equitable rate for all companies would be fairer and more profitable for the government and the economy.

Note, too, that the proposal would discourage domestic companies’ global expansion plans by installing a new minimum tax on offshore earnings.

Do not overlook that tax policy is only one aspect of the federal government’s indifference to economic growth. Environmental standards that slow productivity and discourage development, and employment requirements that discourage hiring, are more visible indicators.

It’s not my point to generate sympathy or antipathy for businesses, but if the debate is to determine whether some or all businesses, or some or all individuals, are paying enough taxes, let’s ask, “enough for whom?”