President Obama this month unveiled a plan to reduce U.S. corporate tax rates to 28 percent while overhauling loopholes. Whatever response this receives from his political friends and foes, it is a superb first step toward the type of comprehensive tax reform we so desperately need. It is not a perfect proposal, though, and its strengths and weaknesses merit mentioning.
The tax cut is important because it moves our tax rate down from the highest in the developed world into a tie for 12th place, along with Norway and Britain. We might have managed a more robust rate decrease, since tax parity with the United Kingdom and any Scandinavian country is hardly ambitious for a country so in need of new business. But it is a move in the right direction.
The president also is proposing the elimination of many tax loopholes and creation (or at least recrafting) of others. Eliminating or phasing out loopholes for corporations is good policy. Creating loopholes is probably good politics.
Obama’s plan is to eliminate loopholes for energy companies and create new ones for manufacturing firms. The condition of the 2012 electoral map should make his motivations clear (though with gas moving above $4 a gallon, as it likely will, the strategy might backfire). The electoral battleground is in the industrialized Midwest, and manufacturing incentives play well with voters. Sadly, they don’t play as well with the economy.
Plenty of high-quality research is available on the ineffectiveness of incentives, but I won’t bore you with that. Look instead to Michigan, the battery capital of the world after the federal stimulus bill shifted tens of billions of public money to battery research and development. (Unfortunately, many of those batteries are sitting in the recently recalled Chevy Volts.) Despite its lofty perch, Michigan’s unemployment rate exceeds 10 percent and the state has set an outmigration record for the Western Hemisphere in modern times.
Tax incentives are popular with corporations and voters who hope against evidence that they work. They are not good for the rest of us.
The president hopes his proposal boosts tax revenue. It is likely that will happen, as lower rates and a broader tax base (through fewer incentives) most often boost tax receipts. This recurring lesson unfortunately deprives policymakers of the opportunity to pick winners and losers among their corporate friends, and hence receive outsized political contributions.
Still, I expect the largest outcry from this policy will come from the president’s erstwhile friends on the left.
Cutting corporate taxes might help keep American jobs, reduce the deficit and better level the playing field for American businesses. That will please many of us who wish prosperity to again embrace the republic. However, it won’t do much to punish those greedy and malevolent corporations, which is an overriding, if illogical, goal of too many Americans.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at firstname.lastname@example.org.