Obama's Misrepresentation of Corporate Taxes

As I have pointed out in earlier blog posts, the U.S. corporate tax rate is essentially tied with that of Japan as the highest in the world. This puts considerable pressure on U.S. companies to expand their operations abroad, rather than in the U.S. and it causes them to outsource more work to such countries as India and China. Obama calls this a corporate policy of exporting jobs. Well, it is, but only in response to government policy that corporate taxes should be so high that they are forced, yes forced, to export jobs. What is worse, corporate taxes are actually set above the rates that would maximize corporate tax revenues to the government. What is the point of that? Clearly, it is simply one of demogogery. It is highly irrational.

Obama likes to claim that McCain simply wants to give tax money to corporations rather than to the middle class. HE fails to observe that many middle class people work for corporations or they have corporations for customers (disclosure: I have corporations for customers.). He rails against giving tax breaks to companies who export jobs, but the effective policy to prevent this is to bring our corporate tax rate more in line with those commonly found in other industrial and rapidly developing nations abroad. This is what John McCain is advocating and Obama calls this a $200 billion gift of additional tax breaks to some of the wealthiest corporations in America. Obama claims that McCain is giving Exxon-Mobil an additional $4 billion in tax breaks.

Alan Reynolds has considered these claims by Obama in an article called "Obama's '$4 Billion for Exxon' Myth," which was published on 1 November in the Wall Street Journal. His major points are:

• The $200 billion tax break for corporations is flat out wrong. An estimate by the liberal Brookings Institution's Tax Policy Center based upon a static view of tax revenues is that the cost will be $78 billion per year over the next 10 years. In fact, this static estimate is surely much too high. Lower corporate taxes result in changes of behavior, making more profit available for taxation.
  
• It is very misleading to claim that McCain will give Exxon-Mobil $4 billion of additional tax breaks. He will because he will lower the corporate tax rate for all companies, but he is also taking away tax breaks more specific to the oil industry, which will cause Exxon-Mobil's already very high taxes to go up by $5 billion in 2013.
• In the U.S., the combined federal and state tax on corporate profits averages 40%. In the 97 countries surveyed by KPMG, the average corporate tax is only 25.9% and has been dropping. In the European Union the average is only 23.2%. The decrease of tax rates in the European Union has led to an increase in tax revenues! Countries such as Ireland, Switzerland, Austria, and Denmark have rates between 12.5 and 25% and collect taxes as a share of GDP which are much larger than the pitiful 2.1% corporations pay in the U.S.
• Jack Mintz of the University of Calgary estimates that combined federal-state corporate tax rates higher than 28% collect less and less revenue as the rate increases. Kimberly Clausing of Reed College thinks corporate tax revenue is maximized at a combined rate of 33%. Kevin Hassett and Alex Brill of the the American Enterprise Institute found the revenue maximizing rate is falling with time and is about 26% now.

John McCain is proposing to cut the federal part of the corporate rate to 30% in 1010-2011, to 28% in 2012-2013, to 26% in 2014, and to 25% thereafter. He is also proposing the immediate expensing of equipment presently written off in 3 - 5 years, though the interest on any money borrowed for the purpose of buying the equipment will not be deductible.

So, if one were to believe that it is important for the federal government to have more tax revenue to pay for its programs, what would be the rational policy to pursue on the corporate tax rate? Well, it would be to decrease the federal rate from the present 35% rate to no more than 25%, since now state rates average about 5%. This would make the combined federal and state rates about 30%, which is a bit higher than the tax maximizing rates according to Jack Mintz and to the AEI researchers.

Obama's desire to keep the corporate tax rate at world highest levels will lead to higher government deficits as he adds program after program to the federal budget and it will force companies to "export American jobs abroad." What kind of idiocy is this? Well, it does play well with the ignorant and the uninformed. It is an effective path to power. This is the point. Obama is not stupid, HE is wrong-headed, but HE is not stupid. HE is without a conscience. HE is committed to promoting socialism, no matter what ills HE calls down upon our society and no matter how many groups HE puts at each other's throats.