In The President’s Framework for Business Tax Reform, which the White House released earlier this week, President Obama advocates lowering the U.S. corporate tax rate to 28 percent. This move is not surprising. Last month, President Obama brought up a basic minimum corporate tax in his State of the Union address.
But the tax cut is not alone. Alongside this cut, Obama advocates cutting corporate tax loopholes. This element is not to be overlooked. There are far too many corporate tax loopholes—which are deductions, credits, and other tax expenditures that benefit certain activities—and they often result in very different marginal tax rates for companies in different industries. They even sometimes result in for different companies in the same industry. It is these loopholes which allow corporations to pay an average rate of 12%, even though the statutory rate is 35%. It is these loopholes that allowed the 100 largest U.S. multinational corporations to pay about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings in 2004 – an effective tax rate of about 2.3%. We must close these loopholes to align the effective corporate tax rate with the official rate.
In fact Senators Carl Levin and Kent Conrad have already introduced a bill, to accomplish just what this. The bill, called Cut Unjustified Tax Loopholes Act or CUT Loopholes, would slice loopholes and, according to the Joint Committee on Taxation and the Office of Management and Budget, would reduce the deficit by at least $155 billion over the next decade.
Lowering the corporate tax rate as outlined in the President’s Framework, alongside passage of the CUT Loopholes Act, makes sense. It is, in fact, true that on the books the United States has one of the highest corporate tax rates in the world. And if Japan enacts a corporate tax cut in April, as anticipated, the United States will officially have the highest tax rate among OECD countries. Closing loopholes without lowering the corporate rate would leave U.S. companies paying a full 14% more than their UK counterparts and 9% more than those in Germany.
But that’s not to say corporate taxes should be reduced too drastically. Given our current budgetary position, and as Citizens for Tax Justice has pointed out, the cumulative effect of these changes should be “revenue-positive.” This means that revenue gains which result from closing tax loopholes should more than offset the revenue losses from the reduction in the corporate tax rate. While many of the principles laid out in the President’s plan look like they may achieve this outcome, the plan is not specific enough about the loopholes to tell for sure.
One way to get there, though, is county-by-country reporting. The plan, rather vaguely, proposes lawmakers reform corporate taxes by increasing transparency and reducing “the gap between book income, reported to shareholders, and taxable income reported to the IRS.” It adds “[t]hese reforms could include greater disclosure of annual corporate income tax payments.” In another section, the Plan notes that multinationals “generally shift income from high-tax foreign countries to low-tax foreign countries [and from the United States to other countries.”
The path to addressing both of these issues is country-by-country reporting. Country-by-country reporting would increase transparency, reduce the gap between book income and taxable income, and discourage multinationals from shifting profits abroad in an attempt to reduce their tax burdens. It would not address all of the loopholes the plan takes aim at, but it would represent a critical step forward in the realm of offshore loopholes.
Disclaimer: Unless specifically stated to be the views of the Task Force, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Task Force on Financial Integrity & Economic Development.