Earlier, we noted the headline points from the Obama administration’s corporate tax reform, which aims to cut the corporate income tax rate from 35 percent to 28 percent, while doing away with a host of loopholes, credits, and deductions. It would lower the rate further, to 25 percent, for domestic manufacturers, while raising about $250 billion to permanently extend and pay for some favored tax credits, like that for research and development.
But aside from the big initiatives, the proposal also includes some important smaller changes that will make the tax code fairer and more equitable. They include:
– A minimum tax on corporations’ overseas profits: Companies like Google are able to use offshore tax havens to drive their tax rate all the way to practically nothing. As Center for American Progress Director of Fiscal Reform Seth Hanlon explained, “among the main reasons the U.S. tax code rewards offshore investment are the loopholes and porous rules that allow multinational companies to avoid U.S. taxes by reporting much of their profits in tax havens such as Bermuda and the Cayman Islands.” The U.S. loses more to corporate profit shifting than it spends on several federal agencies.
– Ending “last in, first out” accounting: This accounting boondoggle allows companies to assume, for tax purposes, that their entire inventory was purchased for the last (most expensive) price. Thus, when they sell off their inventory, their taxable income looks smaller. International accounting standards do not allow the use of LIFO accounting, and both parties have supported its repeal in the past. Ending LIFO accounting could raise $72 billion over five years.
– Taxing carried interest as normal income: Hedge fund managers and private equity managers are able to use a pernicious tax loophole to pay a lower tax rate on their (often) billions in annual income than middle-class families pay on their wages. The administration’s plan would treat the so-called “carried interest” earned by money managers as normal wages for tax purposes, instead of its current treatment as capital gains.
These measures, alone, would not make the tax code perfect, of course. But they would certainly help by ending some of the more abusive practices that have made the U.S. tax code the mess that it is.