Tuesday, March 6, 2012

28% Corporate Tax Rates; Dow Jones Industrial Average? Are The Books Being Cooked?

Did You Forget What Happened At Enron

The Obama administration has unveiled its corporate tax reform plan, calling for lowering the corporate rate from 35 to 28 percent while closing loopholes elsewhere. Officials billed the proposed changes as a way to make America more attractive to businesses while also raising revenue for the government 
"It's a framework that lowers the corporate tax rate and broadens the tax base in order to increase competitiveness for companies across the nation," Obama said in a written statement. He added: "This reform is fully paid for, and it won't add a dime to the deficit." 

Obama has also been all out in his assertion that we need to tax the rich to bring in more revenue so that we can get this pesky deficit under control. He doesn’t mention that he accelerated the level of deficit spending so we are now careening off a fiscal cliff. His logic and thought process to higher taxes equating higher levels of revenue are also very much off base.
Much is being made of his new proposal to lower corporate tax rates. Like most things Obama, the headline is good but the details leave a lot to be desired. This is a President that hates private industry and believes solely in big government solutions to fix problems. Remember, he destroyed the bankruptcy process with car companies and we are left with government holding 26% of GM equity. It’s a loser, just like his new plan.
Treasury Secretary Tim Geithner

Officials have said the reforms would actually raise money, despite the decrease in the rate, by making changes to provisions which Treasury Secretary Tim Geithner called "fundamentally unfair." The plan aims to raise $250 billion over 10 years.
Manufacturers would receive incentives so that their effective tax rate would be 25 percent. But corporations with overseas operations would also face a minimum tax on their foreign earnings; while taxes on oil and gas companies would reportedly see their taxes go up while losing many large deductions and subsidies. 
Instead of a blanket lowering of the rate on all corporations, Obama picks winners and losers and offers incentives for things like green energy. He eliminates loop holes for his least favorite kinds of companies, and opens or extends them for his favorite kinds of companies. The corporate tax proposal is simply another campaign document that gives Obama a good soundbite for the uninformed.
So, Why don’t higher taxes bring in higher amounts of revenue? It has to do with calculus. Think of tax revenue as a curve. Here is a parabola. A parabola that looks like this is the way most people think of tax rates.

The Laffer Curve

The lower you make the rate, the lower amount of revenue you generate. That is the accountants way to look at taxes, and why government numbers are always wrong no matter which party is quoting them. Even in the Republican numbers designed to poke holes in the Obama budget, I see usage of accounting numbers to make their point when convenient.

In reality, people's behavior changes significantly in response to tax rates. "At the margin" is what you need to focus on and get familiar with. Will the incentive to increase production and income increase if tax rates decrease on the next dollar made? Of course they do. More production then leads to higher amounts of revenue generated, even at lower rates. Of course, there is a limit to how low the rate can go before the curve starts to turn the other way.

Geithner, who unveiled the details publicly said, the current code is bad for business, claiming the overhaul would make the system more globally competitive. 

"Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base. Introducing the principle of a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates," reads an outline provided by a senior administration official.

The outline says the manufacturing deduction -- emphasizing clean energy research and development -- would reduce the effective rate on manufacturing to no more than 25 percent.

Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, applauded the president for his overall goal of lowering rates and closing loopholes. However, he said the "corporate-only" plan "fails to address the need for comprehensive reform of our tax code." Urging the president to "keep going," he said the administration would find a "ready and willing partner" in House Republicans when it comes to pro-growth tax reform. 
Sen. Orrin Hatch

Sen. Orrin Hatch, R-Utah, ranking member on the Senate Finance Committee, made clear that he was not impressed. He complained that the new plan lacked detail. 

"I'd hoped the White House would recognize the severity of the problem with a real plan and real leadership. But, after months of promises, we instead got a set of bullet points designed more for the campaign trail than an actual blueprint for fixing our tax code," Hatch said in a statement. "The devil's in the details when it comes to reforming our tax system -- details that are sorely missing in what was released today. Unfortunately, this so-called framework is murky, ill-defined and contradictory to the goal of reducing complexity and making our tax code more efficient."

Despite Hatch's concerns, the announcement last week at the Treasury Department was meant to fill in details of the tax reform outline Obama gave during his State of the Union address. 
The president said at the time he wants to lower the overall corporate tax rate "for the first time in 25 years." The U.S. corporate rate of 35 percent is one of the highest in the world. 
The White House is calling for more "fairness" and "simplicity" in the system, and in a bid to move companies back to the U.S., it would seek a minimum tax on global profits. Currently, many corporations do not invest overseas profits in the United States to avoid the 35 percent tax rate.
The Obama administration wants to appear to create more incentives for corporations to invest in the United States. While the rate itself may be among the highest in the world. Geithner argued that the effective rate is much lower because of all the loopholes in the system.
"We want to bring down the rate, and we think we can, to a level that's closer to the average of that of our major competitors," Geithner told the House Ways and Means Committee.
During his State of the Union address, Obama pitched the tax reform as a way to "knock down barriers that stand in the way" of economic success. He described the tax code as the product of a "parade of lobbyists" rigging the system. 
"Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change," Obama said in January. He urged Congress to "simplify" the system, get rid of loopholes and use the savings to lower the corporate rate. 
Many members of both parties have said they favor overhauling the nation's individual and corporate tax systems, which they complain have rates that are too high and are riddled with too many deductions.
The corporate tax debate has also become an element of presidential politics. Republican presidential candidate Mitt Romney has called for a 25 percent rate while former House Speaker Newt Gingrich has said he would cut the corporate tax rate to 12.5 percent, and Rick Santorum called for exempting domestic manufacturers from the corporate tax and halve the top rate for other businesses.

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