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Townhall...
Why Obama Wants To
Cut Corporate Taxes
By Steve Chapman
America doesn’t feel much like the champion of the world these days.
Everywhere we look, we see other countries outdoing us -- in economic
growth, educational performance and men’s soccer. But this year, we are
expected to gain an impressive distinction: the highest corporate tax
rate in the developed world.
I don’t know about you, but it doesn’t make me feel like chanting “USA!
USA!” If high corporate taxes are a good policy, why are we the only
ones embracing them?
This achievement, of course, may sound like just what you’d expect when
you put a Democrat in the White House. Actually, the rate is the same
now as it was under President George W. Bush. The reason we’re about to
ascend to the top rung is that Japan, which currently has a stiffer
levy, has decided a reduction is in order.
During his speech Monday to the U.S. Chamber of Commerce, President
Barack Obama couldn’t suppress his chronic urge to lecture business
people on their obligations, such as hiring more Americans and
investing more.
But he did admit that the federal government is partly to blame for
their reluctance.
More important, he proposed something that hasn’t been done since the
Reagan administration: cutting rates on corporate income taxes. Obama
would take that step in tandem with streamlining the rules to broaden
the tax base. “We need something smarter, something simpler, something
fairer,” Obama said, in words not calculated to inspire organized labor
or his party’s more liberal elements.
For that matter, it offers no obvious political advantage at all. Few
Americans are haunted by the fear that corporations are paying an
excessive share to the government. On the contrary, the corporate
income tax is most people’s idea of a perfect tax: one that doesn’t
cost them a cent.
But this is a destructive fantasy. In reality, the tax doesn’t come
exclusively out of the bonus packages of super-rich executives. It
exacts a toll from just about all of us.
The problem for workers is that in a competitive world, corporations
can manufacture goods in a multitude of places. With such a high rate
on companies operating here, our tax entices them to move their
operations to Mexico, China, Ireland or any number of other locales.
If you’re a factory worker whose company finds it irresistible to
relocate, you pay a painful price for the high corporate income tax.
Let’s say, however, that the corporate income tax reduces the income of
investors, many of whom are affluent. To some people, this may sound
like a welcome blow for economic equity. But even if the tax works as
intended, ordinary people are worse off.
By slashing the returns to capital, the tax discourages companies from
investing in plants, equipment and technology. But it’s those kinds of
outlays that make workers and managers more productive. Higher
productivity fosters higher wages by making each employee more valuable.
Less investment means lower wages in the long run. That helps explain
why liberal economists don’t like the corporate income tax any more
than conservative ones do.
This levy is also not very good at its only legitimate purpose --
raising revenue. Despite having a high rate -- or because of it -- we
rank near the bottom in the amount of money collected.
One culprit is the long list of loopholes that let a lot of income
escape the clutches of the IRS. Another reason is that if you’re a
multinational company, you will pay lawyers and accountants handsome
sums to find ways to move your income to low-tax places and your
expenses to high-tax places.
Martin Sullivan, a former economist at the Treasury Department and
Congress’ Joint Committee on Taxation, says this happens all the time.
In five low-tax countries whose economies account for only 2 percent of
world GDP (excluding the U.S.), U.S. multinationals reap 21 percent of
their foreign profits.
This oddity, Sullivan testified recently before the House Ways and
Means Committee, is the direct result of “perfectly legal but
economically indefensible assignment of profits to subsidiaries in
low-tax jurisdictions.” The problem has only gotten worse as rates have
come down abroad but not here.
The left of his party may demand to know if Obama wants to accommodate
big business or stand up for the interests of workers. But who says we
can’t do both?
Read it at Townhall
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