Wednesday, February 22, 2012

Cutting Corporate Income Tax Rates

I was skeptical that Obama's sudden concern for business was real.  From the February 22, 2012 New York Times:
While details were sketchy, an official said Mr. Obama’s tax framework would “refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.”
Ah yes, more money being shoveled into the pockets of the people who will be supporting his re-election campaign.

There is no question that serious reforms are required.  The U.S. has one of the highest corporate income tax rates in the industrialized world.  (Any guesses whether this might encourage multinationals to move manufacturing offshore?)  The article also discusses the problem that our high tax rates encourages U.S. companies to find ways to move profits made in the U.S. into their foreign subsidiaries, where corporate tax rates are lower.  One strategy is for X-USA to pay X-Istan $110/barrel for oil, when the market price is actually $100/barrel, because Istan has a lower corporate tax rate.  This is actually already illegal, but you have to audit X's tax return very carefully to make sure that you catch it--and apparently, big companies are not audited as carefully as you might assume.

The deferred compensation plans that executives of big corporations enjoy are an area that desperately needs reform (although not strictly part of the corporate income tax problem).  To be blunt, there is no reason why a person who makes millions of dollars a year should get any special tax treatment of that income.  Let them have  access to a 401(k) plan, like people that make tens of thousands of dollars a year.  If that isn't enough to hold them, the corporation can raise their salary or stock options, and let them pay at either the high marginal tax rates, or enjoy the capital gains advantages from sale of stock options.  The fact that deferred compensation is only for the fattest of the fat cats is like reversed socialism.

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