Monday, February 27, 2012

Obama's proposed tax reforms face challenges

Business Times - 28 Feb 2012

Obama's proposed tax reforms face challenges


SO what's not to like about President Barack Obama's proposed changes to the US corporate tax structure? After all, both Democrats and Republicans, as well business executives and labour leaders, seem to agree that the current US corporate tax code is useless and riddled with loopholes, breaks and credits that are crafted by Washington lobbyists to favour their powerful clients. At the end of the day, all these loopholes reduce the tax revenues that the federal government is supposed to collect.

Moreover, since the current corporate tax of 35 per cent is higher than in most of the other major industrialised nations, it seems much cheaper to do business in Asia and Europe, placing the US economy at a disadvantage at a time when very few politicians and analysts disagree on the need to increase the global competitive edge of the American economy and ensure that American companies expand their operations at home as opposed to doing it in China.

Indeed, under the current tax code, some companies spend more resources on paying lawyers and accountants who help them circumvent the tax rules than on financing new research and development programmes, while investors are drawn to put their money in low-tax industries and not in the high-tax ones that in many ways are more productive.

At the same time, there is something rotten in a system in which the oil and gas industries tend to benefit from special subsidies and end up paying less in taxes than manufacturers that are investing in job creation at home. From that perspective, the Obama administration's proposed reforms, the Framework for Business Tax Reform including the lowering of the maximum rate from 35 per cent to 28 per cent (and to 25 per cent for manufacturers), providing incentives to boost hiring and ending tax preferences that favour special interests, make a lot of sense.

Indeed, the leading Republican presidential candidates also favour changing the corporate tax code, with former House speaker Newt Gingrich calling for cutting the rate to 12.5 per cent and former Pennsylvania senator Rick Santorum proposing that the rate on manufacturing companies be lowered to zero.

In a way, the formula for reform is quite simple. Washington lowers the top corporate tax rate and in order to make up for the loss in federal revenues, it reduces the many tax loopholes.

Productive American businesses and workers win. The lobbyists, the lawyers and the accountants lose.

The result: more hiring of new workers and more tax revenues to help reduce the federal deficit. Indeed, what's not to like?

Not much, except perhaps for the timing. You don't have to be a political genius to figure out that not much is going to be achieved in the US Congress - especially when it comes to a major plan to reform the tax system - before the November election. So what's the point?

The point is that both Mr Obama and his Republican rivals are promoting their respective tax reform proposals as part of election- year campaigning. Mr Obama and the Democrats would argue that their plan to reform corporate tax code fits into their overall economic policy that aims at rebuilding the American economy and creating new jobs while getting rid of tax loopholes and shelters that favour the rich.

Mr Obama also proposed an alternative minimum tax on the overseas profits that American companies make. The Republicans will counter by proposing even lower corporate tax rates (and not explaining how they would pay for that) and by suggesting that Mr Obama's plans to raise the rate of income taxes on the wealthy 'job creators' - for example, by raising taxes on buyers of corporate jets and taxing overseas profits - will provide the same kind of disincentives for creating new American jobs as the current corporate tax code does. And it is not even clear that the modest changes in the corporate tax structure would have a dramatic impact on the expansion in American manufacturing or would deliver a major blow to the lobbyists in Washington.

After all, the current system of loopholes, breaks and credit does reduce the tax burden on many manufacturing companies, and eliminating these tax preferences and replacing them with a lower tax rate is not going to make much difference as far as what the companies pay the government in taxes is concerned. Those lawyers and accountants do - and will continue to do - a good job. Just ask the executives of companies such as General Electric (GE).

And stay assured that lobbyists for GE and other companies which provide financial support for both Republican and Democratic candidates would not only fight tooth and nail against any proposed reform. They would also make sure that their clients would be able to play and circumvent the new tax system, proving once again that the more things change, the more they remain the same.

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1 comment:

Apartment or Flat said...

In my opinion it comes only natural that these propositions will not go without any opposition.