President Obama announced Wednesday his corporate tax plan—which includes lowering the top corporate income-tax rate from 35% to 28%. Time to break out the party hats at corporate headquarters, right?
Not quite. As with anything political, it’s not so simple—and that goes double in an election year. It’s not all a Laffer-esque lowering of the tax rate—wrapped in are cuts to certain deductions and exemptions, increased taxes on US companies with large overseas operations and a new minimum tax rate on foreign earnings. In that sense, this proposed corporate tax cut could easily be seen as a corporate tax increase.
Before teeth-gnashing (for any of a variety of possible reasons) commences, some reminders: This being an election year makes the likelihood of any major reform along these lines passing pretty low. There are many potentially impacted parties—not least among them manufacturers, energy companies and US-based multinationals. And politicians are highly unlikely to risk upsetting donors … er, constituents … ahead of election day. Plus, this proposal’s already been in the administration’s works for two years. Meaning folks who are generally on the same side of the political table couldn’t quickly agree—hardly inspiring confidence a split Congress will expediently place it on the president’s desk for signature.
That said, let’s take a look at some of the plan’s key points. For one, it aims to limit exemptions. A fine enough goal, in our view—the simpler the tax code, the better. Trouble is, it seems only some exemptions are under the microscope—namely, those given the Energy industry. But Energy’s hardly the only tax-favored industry—far from it. And if you agree tax exemptions are inefficient and you want them cut for one, shouldn’t you cut them across the board?
Then, the administration purports the plan gives us a “fairer” tax code—which seemingly means one that plays favorites less. Also a fine enough goal, but isn’t handing tax benefits to manufacturers (as the new plan proposes, and which seemingly has some bipartisan support, by the way) simply switching who the “favorite” is? (Not to mention favoring manufacturing strikes us as odd for other reasons, too—like the fact it isn’t hurting as much as many presume.) If politicians truly see an incrementally lower tax rate for manufacturers as a big competitiveness boost, we’re again left wondering why it shouldn’t apply across the board.
Suffice it to say the views on how to fix the corporate tax code are as all over the map as the code itself. In our view, simpler and flatter is generally better (an idea we elaborated on here). Maybe eliminate dividend taxes (which is effectively double-taxation on what amounts to a return of capital) altogether, eliminate exemptions and loopholes across the board and drop the rate to something more globally competitive—something like that.
Tax code simplification would reduce both direct and indirect compliance costs and make for a far less politicized and far more predictable tax structure. Less money spent on tax preparation means more money to spend elsewhere—and businesses spending money elsewhere can carry with it rather sizeable economic returns. Ultimately, positive economic returns are what boost tax returns most (among myriad other positives).
Unfortunately, the chances any of that ever happens are quite a bit lower than the low odds the president’s proposal passes speedily and intact this year. For investors, that’s not such bad news given markets’ preference for predictability. Though we confess—when it comes to corporate taxes, we sometimes wish politicians would be slightly less predictable.