Editorial: Making sense of tax cuts

President Obama’s call for a cut in the corporate tax rate from its current 35 percent to 28 percent is not bad economic or politics, but there is a danger: getting the Republican Congress to go along with corresponding cuts. The political battle is easily foreseen: Republicans will agree to the tax cut, but refuse to close enough of the corporate loopholes to pay for it and simplify the tax code, and yet will say the president is reneging on his promise to cut taxes if the Republicans don’t go along. The political compromise could result in a lower corporate rate, little reform on closing loopholes and deductions, and a higher deficit.
So, why did the president make such a risky suggestion?
First, some numbers:
• The current corporate tax rate of 35 percent is one of the highest in the world, but because so many companies benefit from tax loopholes (or tax credits) U.S. companies pay about half the taxes paid in other wealthy nations compared with the size of the economy… and some, including big oil and gas companies, pay very little at all.
•  The corporate tax rates of the next six western countries are: France, 34.4 percent; Japan, 30 percent; Italy, 27.5 percent; Britain, 26 percent; Canada, 16.5 percent; and Germany, 15.8 percent.
• Corporate taxes as a percentage of GDP (gross national product) as of 2010, are: Canada, 3.3 percent; Britain, 3.1 percent; Japan, 2.8 percent; United States, 2.7 percent; France, 2.1 percent; Germany, 1.5 percent.
Using just the straight numbers puts the U.S. roughly in the middle of this group concerning tax burden, but when you add in the deductions and loopholes, the U.S. burden on corporations drops far less. The president’s proposal seeks to make the economy stronger and fairer by cutting the deductions for industries who don’t need the help (oil and gas companies), and putting incentives in place where it would do more good (entrepreneurs in alternative energy, for example.) The total package would be on the plus side of revenue neutral, or a slight increase in corporate taxes — if he can win the lobbying and political battles, which is no sure bet.
Conservative New York Timescolumnist David Brooks picked up on this theme last week by noting how this country’s tax breaks hide what would otherwise be represented as larger government: “The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks… In Europe, governments offer health care directly. In the U.S., we give employers a gigantic tax exemption to do the same thing…. In Europe, governments subsidize favored industries. We do the same thing by providing special tax deductions and exemptions for everything from ethanol producers to Nascar track owners.
“These tax expenditures are hidden but huge… (about) $600 billion in 2007. If you had included those preferences as government spending, then the federal government would have actually been one-fifth larger than it appeared.”
Brooks went on to explain how a tax break is like government spending, noting that instead of writing a $10 billion check to a manufacturer to build a new fighter plane for the Pentagon, they issue a $10 billion “weapons supply tax credit.” The company that wins the contract gets its money through a tax credit instead of a government check. “And politicians get to brag that they had cut taxes and reduced the size of government!”
While some of the tax breaks are good, Brooks writes, “the cumulative effect of the tax breaks is terrible. Like overgrown weeds, the tangle of tax breaks distorts behavior, clogs the economy and deprives the government of revenue. And because they are hidden, many of the tax (breaks and loopholes) go to those who need them least — the well connected and established over the vulnerable and the entrepreneurial.”
Republicans and Democrats agree that the need for tax reform is acute, but whether the parties can act in ways that will ultimately improve the system is another matter. Voters, nonetheless, should keep their eyes on the prize: tax reform that simplifies the current system, stimulates the economy, and provides social support where it’s needed most.
Angelo S. Lynn

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