The President's Corporate Tax Reform: Going from Bad to Worse

The president is out and about promoting his corporate tax reform. He wants to alter the tax code because the corporate tax system is “uncompetitive, unfair, and inefficient”. The president will take the rate from 35 percent down to 28 percent, eliminate some deductions, expand others, impose a minimum tax on foreign income of US companies, create a special rate for manufacturers, and raise taxes on dividends.

NRO has a good right up, here. The highlights are below:

1. The reduction in the corporate-tax rate is a first good step but it’s not enough to put the U.S. on par with countries with competitive tax rates.  Reducing the rate to 28 percent would move the U.S. from the second-highest rate to the fourth-highest rate of all developed countries.

2. The plan reduces the rate but fails to address what is perhaps the biggest penalty imposed by the current corporate tax: The worldwide tax system. Under the current system, profits made by an American-owned computer plant — think Apple or Microsoft — are subject to U.S. taxes whether the plant is located in Texas or Ireland. Most major countries don’t tax foreign business income. As a result, many companies are not bringing their profits back to America.

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3. Related to this issue is the idea to implement a tax on U.S. companies’ foreign earnings. The president’s proposal — and most newspapers reporting on the issue — makes it sounds as if U.S. companies don’t pay any taxes on their foreign earnings. It is not true. A U.S. company operating abroad pays taxes in the country where the income is earned. Adding an extra layer of taxes onto U.S. companies competing abroad, and hence making then less competitive, is hardly the answer to the discrepancy. The tax reform should have lowered the rate and moved to a territorial tax system.

4. The reform could penalize workers in America and workers employed by U.S. companies abroad more than they already are being punished. First of all, corporations don’t pay taxes, individuals do. Second, in this case, the individuals paying it are not necessarily the shareholders. The tax burden could be placed on the worker who may not receive a raise because higher taxes must be paid.

5. This tax reform continues the tradition of picking winners and losers. For instance, while it eliminates some of the deductions that companies are getting, it won’t get rid of all of them, and it will even expand the deductions for a special few. This is wrong.

As reported in the WSJ, the President also wishes to raise taxes on dividends. That would be a mistake. With his proposal combined with his healthcare plan that adds additional taxation to dividends will create a total divided tax rate of 44.8%.

Due to the nature of dividends, they are only paid out after they have been taxed at corporate profits up to 35%. Therefore, the profits shareholders receive would be taxed at a combined rate of approximately 64.1%.

We know that when the dividends tax rate is reduce more corporations will be willing to pay out dividends to investors.

“As former Citigroup CEO Sandy Weill explained at the time: “The recent change in the tax law levels the playing field between dividends and share repurchases as a means to return capital to shareholders. This substantial increase in our dividend will be part of our effort to reallocate capital to dividends and reduce share repurchases.”

Think this will only hurt the 1%ers who are investors? Wrong actually. As reported by the WSJ:

“Who would get hurt? IRS data show that retirees and near-retirees who depend on dividend income would be hit especially hard. Almost three of four dividend payments go to those over the age of 55, and more than half go to those older than 65, according to IRS data.