Corporations don’t need a tax cut, so why is Obama proposing one?

The Obama administration is proposing to lower corporate taxes from the current 35 per cent to 28 per cent for most companies and to 25 per cent for manufacturers.

The move is supposed to be “revenue neutral” - meaning the administration is also proposing to close assorted corporate tax loopholes to offset the lost revenues. One such loophole allows corporations to park their earnings overseas where taxes are lower.

Why isn’t the White House just proposing to close the loopholes without reducing overall corporate tax rates? That would generate more tax revenue that could be used for, say, public schools.

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This is actually a very sensible move in the framework of a capitalist system. Lets face it, we have some of the highest corporate tax rates in the developed world if  you actually pay them. This means that companies with legal teams of the shadiest scumbags they could afford pay next to nothing and take advantage of offshore profits using the loophole Obama promises to close. Meanwhile, small businesses, particularly in the tech sector and other valuable sectors including manufacturing are pushed overseas because their focus is not on the cynical manipulation of the system like the financial sector, their focus is on production and innovation. 

I don’t think this is right. Most small businesses don’t pay the corporate tax; they’re organized as partnerships or sole proprietorships and they pay the individual rate. Those folks won’t see any benefits from the proposed reform. Moreover, you’re drawing this distinction between the financial sector and “valuable sectors” with respect to the degree of their use of “legal teams of the shadiest scumbags” that just isn’t realistic. Manufacturers like GM and Ford, natural resource extractors like Exxon Mobil and Shell, consumer products companies like Proctor & Gamble - I assure you, these guys are mostly retaining the same white shoe firms as Goldman Sachs, Citigroup and BofA/Merrill Lynch. The distinction between larger and smaller corporations is more apt, as they really do interact with the tax code in different ways. But I’m not convinced that there’s something really special about small or midsized businesses such that we ought to shift the tax burden off them and on to larger businesses. That calls for more of an argument than just asserting that smaller corporations are more productive.

…On top of all this, the revenue neutral approach is one that is just the icing on the cake…

The revenue neutral approach is what makes me think the impact on US growth is going to be pretty negligible. The overall tax burden on US corporations is going to stay the same. The biggest effect is going to be to reduce tax related legal/compliance costs for US corporations, which isn’t nothing, but the benefits of that will mostly flow to the largest corporations that have the largest compliance costs.

Well if you are talking about small shops, restaurants, etc, then of course they do not become incorporated however when you talk of any company that makes substantial risks in their business, they do incorporate. When we’re talking about the innovators who brought about the tech boom of the 1990s, they did incorporate and make an IPO for their stock fairly quickly as a way to secure investment in big plans that oftentimes revolve around the development and implementation of a technology. The tech giants we know today such as Ebay, Google, Amazon and others were very small corporations just 15 years ago, if they even existed. If we want more success like that, if we want a more humane form of capitalism that focuses on the development of technology rather than schemes such as the last housing “boom”, we have to lower the tax rates those specific small corporations pay. 

And the point of pushing the burden off of the small corporations is to inspire competition, rather than complacency in the market. For a market to truly work at it’s true potential, you cannot have complacent actors, you need businesses that are fearing they may lose their profits to a competitor with a better business model or innovation. When the big guys all are able to crush any competition that comes their way and maintain a monopoly or oligopoly on the market, they become complacent and you start seeing cartel behaviors on their part, where they would rather work with their competitors of equal strength than against each other which ends up breeding markets such as the oil market. 

And the revenue neutral approach doesn’t negate the growth of the economy. You seem pretty educated on economics so I don’t think I need to remind you about MPC and MPS? These small companies have a much higher propensity to consume and purchase because it’s life or death for them, if they don’t do something, the whole venture goes bust. They have to break into the market and they put all their resources towards that. However, with large corporations the propensity to consume is much lower and the propensity to save is much higher. They need not reinvest if there is not a lot of competition coming from beneath. They can save the money instead for a rainy day, since it won’t get taxed much anyway and perhaps buy out a weak competitor later on in a game of wait and see. At the end of 2010, Moody’s reported that companies sat on approximately 1.2 trillion dollars in cash and liquid funds. Not credit, not loans, this was their money that they could spend in anyway they wanted. And some of the largest companies held up to 60 billion dollars in cash, refusing to invest it, uninspired by competition.

The key here is that increasing competition and putting money into the hands of those more likely to spend it will stimulate the economy by making spending the imperative of these corporations. The large corporations have the cash to stimulate the economy in direct and organic means. We just have to promote the right conditions for them to do so.  

It’s true that almost all smaller businesses incorporate in a form that avoids the double taxation of “C” corps. Most avoid sole proprietorships and use Sub S or LLC structures to protect themselves while gaining the beneficial tax treatment. But the revenue neutral corporate tax cut is a good idea. Anything that improves net profits potentially stimulates business growth, giving companies more capital to invest and/or less debt. Even though this particular change won’t affect most small companies directly, it will benefit them indirectly as larger companies expand. I don’t agree that larger companies tend towards stasis. If they’re public, they need to grow earnings, and productivity only gets you so far. Investors prefer companies whose earnings growth comes from sustained revenue growth, not just from productivity improvement. A revenue neutral lower corporate tax rate will be a win win.

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