The Obama administration’s proposed reforms stand as much chance of getting through a near-catatonic Congress as, well, just about anything else that comes with the White House seal of approval.Reuters
Democrats and Republicans alike agree that the ineffective, inefficient, loophole-riddled U.S. corporate tax code badly needs a thorough overhaul. They even agree that the end result should be the removal of a plethora of loopholes, a reduced top rate and a structure that favours job creation at home over foreign outsourcing and coupon-clipping.
Yet the Obama administration's proposed reforms – featuring a lower maximum rate, incentives to boost hiring and an end to a tax preferences and deductions favouring special interests – stand as much chance of getting through a near-catatonic Congress as, well, just about anything else that comes with the White House seal of approval. Which is to say somewhere in the vicinity of zero. Make that less than zero. If there's one thing the politicians are really good at, it's protecting their sources of campaign financing. And the myriad loopholes that keep so many tax lawyers busy and wealthy are the product of years of heavy lobbying and even heavier political donations.
President Barack Obama would love to leave a lasting legacy of big accomplishments on his watch. Going into the Oval Office, his top priorities were a national health care scheme and a serious climate change plan. But his dreams got sideswiped by the financial crisis, a sinking economy and a much nastier political environment in Washington than he ever expected to encounter.
It's obvious that his ambitious tax reform plan is all about electioneering, on both sides. The Obama re-election machine will be targeting the rich and the elusive among taxpayers – both individuals and corporations – particularly those that shelter income offshore, through a minimum tax on foreign profits. The idea is to lower the maximum corporate tax to 28 per cent from 35 per cent and significantly boost revenue by whacking a lot of loopholes.
The current top U.S. federal corporate tax rate of 35 per cent compares unfavourably with most other jurisdictions. But the actual take was only 12.1 per cent last year.
So it's a pitch for a simpler and fairer tax system that will put more of the burden on certain cash-rich sectors like oil and gas, by ending their special subsidies. Meanwhile, manufacturers who keep jobs at home will face lower tax bills. Yet another reason for the rejuvenated auto industry to rejoice. They might as well hand over Michigan and a handful of other industrial states to the Obama side right now.
The Republicans will counter that any sector hit with higher tax bills, such as petroleum (effective tax rate of 11.3 per cent, based on a New York University study in 2009), pharmaceuticals (5.6 per cent) or Internet services (5.9 per cent), will simply pass on the costs to consumers. And both parties will be welcoming fresh campaign contributions from all those worried about losing their cherished tax breaks.
When the dust finally settles, corporate taxes at the highest level may well be reduced. But too many of the special-interest breaks will remain to produce a significantly better revenue stream for a deficit-challenged government.