Lowering corporate tax rates to make U.S. multinationals more competitive abroad is one way President Obama may improve his standing with business. Tomorrow, Treasury Secretary Tim Geithner will meet with top business leaders to explore this possibility. President Obama may address the issue in his January 25 State of the Union Address and in his February 7 speech to the U.S. Chamber of Commerce. Here are some questions that I hope Mr. Geithner would ask.
1. How much do you want to lower the top corporate tax rate? Our current 35% top federal rate plus our 4.1% average state tax rate is the highest in the world along with that of Japan as shown in this Tax Foundation table based upon OECD data. Our European trading partners have comparable rates ranging from 30% to 34%, so we would have to lower our rate by at least 5% points to become comparable. U.S. multinationals overwhelmingly support lowering our corporate tax rates.
2. Should we move to a territorial tax system? That would allow U.S. companies to repatriate dividends tax free. This is how almost all of our trading partners operate, so in some sense it would “level the playing field” with foreign competitors. However, as discussed in this Joint Committee on Taxation analysis (See pages 21-49.), there would be plenty of winners and losers depending upon how expenses are allocated, particularly R&D, and how much royalty payments are paid overseas. There are several conflicting studies on the effects of moving to a territorial system. Most U.S. multinationals support the idea, so they must believe they would be better off. Whether that would translate into increased U.S. employment is unclear.
3. Are you willing to accept the broader tax base implied by your previous answers? Given our deficits of 9% of GDP, any tax reform would have to be revenue neutral. So whatever tax cut arises from moving to a territorial system and from lower the rates would have to be offset by the repeal of tax breaks. President Obama has already proposed over $440 b. FY11-FY20 of business tax reforms, which would be a logical place to start. Here’s a detailed description, and be sure to look at the revenue tables at the end. This would convert a lot of winners to losers and possibly scuttle the effort.
4. Could we lower corporate tax rates without lowering individual tax rates? The last major tax reform we had in 1986 raised corporate taxes significantly to pay for lowering the top individual income tax rate to 28%. It’s a stretch to think Congress could get away with lowering business tax rates without lowering individual tax rates. Business leaders are in no mood to finance individual tax reform again. There are plenty of individual tax breaks that could be repealed to finance a lowering of individual tax rates, but most are concentrated in deductions for health insurance, mortage interest, and charitable contributions, all politically potent groups.
This will be a closed door meeting. It will be interesting to see what statements, if any, are made afterward.