Sunday, February 26, 2012

Corporate Income Tax Changes: Why Revenue Neutral?

The Administration has proposed a lowering of the nominal corporate income tax rate from 35% to 28%. The lost revenue would be recouped by eliminating tax credits and loopholes. The stated intention is to produce modifications that will lead to revenue neutrality. The goal of revenue neutrality clearly has some political benefit, but does it make sense for a country in desperate need of additional income?

Our corporate tax rate is often described as though it is way out of alignment with the rest of the world—"second highest rate in the world." But is that really an accurate representation?

Our rate is not much different from that of other countries. Lowering it to 28% is a reasonable way of making it even more consistent with comparable nations.

If we have a higher tax rate than other countries then we must benefit from increased revenue—right? Chuck Marr has produced an article for the Center on Budget and Policy Priorities that argues the need to increase revenue from corporate taxes. He provides this chart (2007 data) that indicates that our supposedly high rate does not translate into high revenue.

Then there is also this chart that indicates that revenue from corporate income taxes has been falling for many years, and it continues to fall.

It is occasionally argued that taxing corporations is counterproductive, or ineffective, or even unfair. We have addressed that issue previously in Corporate Income Tax: Does It Make Sense? It was argued that corporations take advantage of the infrastructure and protections of society just like citizens do, so let them pay their share of taxes. Particularly, now that they have been given permission to purchase senators and congressmen, just like any other wealthy citizen, let them pay taxes like any other wealthy citizen. If they threaten to move outside the country to avoid paying, tell them goodbye and don’t plan on ever returning; if they wish to create product outside the country and bring it back into our domestic market, tell them that like any other hostile foreign entity they will have significant import duties imposed. If they complain about double taxation, tell them "too bad, everyone gets double taxed." End of vent.

One way or another, revenue from corporate income taxes must increase.


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