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Obama Will Propose Lowering Corporate Tax Rate to 28%

For a couple years now, the Obama Administration has supported a reduction in the corporate tax rate, paired with a broadening of the corporate tax base by removing loopholes. The effect of this is supposed to be revenue-neutral. Considering that the effective corporate tax rate, according to the latest statistics for the last fiscal year, stands at 12.1%, I’m not sure why revenue neutrality is a goal. But for what it’s worth, the Administration will formally release, through the Treasury Department, their corporate tax plan today.

President Obama will ask Congress to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, down from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent, a senior administration official said on Tuesday.

Mr. Obama also would establish a minimum tax on multinational corporations’ foreign earnings, the official said, to discourage “accounting games to shift profits abroad” or actual relocation of production overseas.

With the framework for changes that the Treasury secretary, Timothy F. Geithner, will outline on Wednesday, Mr. Obama will enter an election-year debate with Republicans in Congress and in the presidential race who seek even lower taxes for businesses. But an overhaul of the corporate code is unlikely this year, given that political backdrop and the complexity of an undertaking that would generate a lobbying frenzy as businesses vie to defend old tax breaks or win new ones.

The 28% rate proposal nears the 25% rate proposed by House Ways and Means Committee Chair Dave Camp (R-MI) last year. Republican Presidential candidates have gone even lower than that this primary season. Incidentally, the Joint Committee on Taxation wrote last November that you could scrap every single corporate tax break (which isn’t going to happen) and not be able to reduce the nominal rate below 28% without adding to the deficit.

I like how Obama is handing this one off to Geithner, making it his policy, so as not to sully the newly populist image. But that didn’t seem to work, as the headlines in the NYT and the WaPo both said “Obama will propose” this reduction in the corporate tax rate. They can’t be happy with those headlines in the White House.

Geithner and the Administration have made a corporate tax overhaul a priority for two years. And again, they claim that the revenue lost by lowering the nominal rate will return to the government by closing loopholes. But there’s a very large and sophisticated industry of corporate lobbyists, united on nothing so much as the money their clients have to pay to the government, which will go line by line and blow as many holes in a corporate tax overhaul as possible. The tax reform of 1986 achieved by Ronald Reagan had a similar dynamic of lowering the rate and broadening the base. And then the loopholes came back over the years and the base narrowed.

Heck, we already see a loophole here for manufacturing. And tax expenditures are frequently handed out like candy to businesses, by members of both parties. Taking the complication out of the corporate tax system is a decent enough goal, especially as it relates to taxes on overseas profits. But the complications aren’t being spearheaded by the government but by corporate lobbyists seeking advantage, and they will almost surely return.

There’s so much tax avoidance in the system that even talking about a corporate tax rate is a bit of a fallacy.

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David Dayen

David Dayen