In recent days, the McCain campaign has sought to refocus the 2008 Presidential issues on the two candidates' tax policy proposals. The first piece, which Mr. Hart wrote about last week deals with the federal personal income tax. The Obama and McCain campaigns also differ on the what to do with federal corporate income tax.
Obama's campaign is not specific on what it plans to do with the statutory rate, but has a number of potential tweaks to the corporate tax code including: offering tax credits for job creation, healthcare coverage for employees, investing in R&D, and "closing" special loopholes.
McCain's tax plan is a little more straightforward. He plans on convincing congress to cut the corporate tax rate from 35% to 25%.
Obama's campaign is not specific on what it plans to do with the statutory rate, but has a number of potential tweaks to the corporate tax code including: offering tax credits for job creation, healthcare coverage for employees, investing in R&D, and "closing" special loopholes.
McCain's tax plan is a little more straightforward. He plans on convincing congress to cut the corporate tax rate from 35% to 25%.
It's a little hard to compare these two proposals, but the simple fact of the matter is that US corporate tax rates are higher than much of the rest of the world. This has some dramatic implications with the way in which businesses conduct their operations and structure themselves.
1. High corporate tax rates are very instrumental in creating an incentive to add leverage in the US. Firms will increase in value (to a certain degree) as they are able to deduct interest from their taxes. This results in wealth transfer away from the government despite higher tax rates. Additionally, it has increased the overall structural risk in the economy (as we are seeing today).
2. The US has a worldwide tax system, in which US domiciled firms are subject to US corporate tax on their worldwide earnings less credit companies get for paying foreign taxes. Foreign companies are also subject to paying taxes on any US earnings. Most countries have a territorial tax system, in which they only collect tax on earnings within their geographic borders. Why has this created a distortion? US domiciled companies have begun to incorporate outside the US in order to shield their foreign income from higher tax rates. Also, most foreign earnings do not get taxed unless they are repatriated in the US. These games are only effective if the US has a higher tax rate than the rest of the world.
3. It is a terrible way to generate revenue. As the tax foundation's article states, the US tends to have a much narrower base of corporate profits from which it can extract revenues than do other countries. In this way, high US corporate taxes help support the country's current system of personal tax rates. If corporate taxes are cut, there are more targeted methods to maintain current wealth distribution and revenue profiles: VAT, luxury tax, dividend tax, as well as higher personal tax rates.
If the country implements some of these changes, there is a great opportunity to reduce distortion in the system and putting the government's revenue generation model on sound footing.
1. High corporate tax rates are very instrumental in creating an incentive to add leverage in the US. Firms will increase in value (to a certain degree) as they are able to deduct interest from their taxes. This results in wealth transfer away from the government despite higher tax rates. Additionally, it has increased the overall structural risk in the economy (as we are seeing today).
2. The US has a worldwide tax system, in which US domiciled firms are subject to US corporate tax on their worldwide earnings less credit companies get for paying foreign taxes. Foreign companies are also subject to paying taxes on any US earnings. Most countries have a territorial tax system, in which they only collect tax on earnings within their geographic borders. Why has this created a distortion? US domiciled companies have begun to incorporate outside the US in order to shield their foreign income from higher tax rates. Also, most foreign earnings do not get taxed unless they are repatriated in the US. These games are only effective if the US has a higher tax rate than the rest of the world.
3. It is a terrible way to generate revenue. As the tax foundation's article states, the US tends to have a much narrower base of corporate profits from which it can extract revenues than do other countries. In this way, high US corporate taxes help support the country's current system of personal tax rates. If corporate taxes are cut, there are more targeted methods to maintain current wealth distribution and revenue profiles: VAT, luxury tax, dividend tax, as well as higher personal tax rates.
If the country implements some of these changes, there is a great opportunity to reduce distortion in the system and putting the government's revenue generation model on sound footing.
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