Right Idea, Wrong Direction: Obama’s Corporate Tax Reform Proposals

The need for US corporate tax reform is blindingly obvious. Conservatives contend that the top corporate tax rate—whether measured in statutory or effective terms—is the second highest in the Organization for Economic Cooperation and Development (OECD). Liberals argue that the US corporate tax system is riddled with complex "loopholes," enabling many firms—whether or not incorporated—to pay less than their fair share. Responding to these criticisms, Obama's White House and Treasury Department released a joint report entitled "The President's Framework for Business Tax Reform." Unfortunately, the report omits the detail needed to fully assess its proposals. But if the devil ever lives in the details, it is in the details of the tax code. Instead of details, the Framework report focuses on five elements of reform: the nominal and effective corporate tax rate, incentives for domestic manufacturing, taxation of international income, the tax code for small business, and the fiscal impact of proposed reforms. The report greatly exaggerates the revenue loss entailed by cutting the statutory corporate tax rate, and it proposes damaging new taxes on international business that would undermine US exports. Overall, the report unduly concentrates on manufacturing activity, while neglecting America's strength in services, the most prominent future driver of jobs, investment, and growth. Projected revenue gains are not large enough to help curb the rising debt-to-GDP ratio, but the report ducks any discussion of a national consumption tax.