Taxation & Estate Planning

Rangel corporate rate cut proposal

"New York Representative Charles Rangel said he's revising his tax overhaul proposal to reduce U.S. corporate tax rates to 28 percent, down from the current rate of 35 percent .... [to be financed] by targeting special-interest provisions that favor some industries and companies over others.

"Only Japan has a higher marginal corporate tax rate among developed nations, the Treasury Department said last year. When state taxes are factored in, U.S. corporations pay about 39 percent on their last dollar of profit.

"Obama has said that the effective tax rate paid by U.S. companies is much lower once they claim deductions, credits, and other adjustments to taxable income. In 2006, for example, American companies paid an average effective tax rate of about 23.7 percent, according to a study by Ernst & Young LLP."

Tax preferences that Rangel says are on the chopping block include the domestic production incentive, LIFO accounting, some stuff for multinationals, and something in the carried interest realm.

A few points to keep in mind here: First, cutting the corporate rate and broadening the base is generally an unambiguously good idea (keeping in mind, however, that for outbound investment this depends on whether a worldwide tax is optimal, as seems unlikely given its resting on the weak reed of corporate residence).

Second, a fully financed domestic corporate rate cut (i.e., not necessarily financed by corporate base-broadening) is also highly likely to be a good idea in the setting of worldwide tax competition.

Third, even if the effective tax rate paid by U.S. companies on domestic investment is low, a high marginal rate is still a problem - not just for the general reasons why base-broadening plus rate-cutting is desirable, but also because in various cases it will be the marginal rate, not the effective rate, that drives particular decisions in the realm of worldwide tax competition. (An example is transfer pricing incentives to treat marginal dollars as foreign source rather than U.S. source.)

Here's hoping Rangel gets somewhere on this, although it is more out of his playbook than Obama's.

Full post as published by Start Making Sense on November 16, 2008 (boomark / email).