What is in this article?:
Congress should reduce the statutory rate to something closer to 20%; but rather than eliminate key growth incentives to pay for deep rate reduction, it should preserve and expand them.
There is significant talk in Washington about the need for comprehensive corporate tax reform. Such reform could be the most important economic policy decision Washington makes. Its effects would likely have critical implications for the health of the U.S. economy for years to come.
But despite the talk, it’s not clear when or even if Congress will pass legislation. Indeed, it may not be until after the 2016 Presidential election that Congress is able to do this.
But regardless, it’s worth considering what kind of tax reform would be best for manufacturers in the U.S. One reform that would help would be a lower effective corporate tax rate. At a combined state-federal rate of 39%, the United States has the highest statutory rate in the world. But there is also evidence that the United States has one of the highest effective corporate tax rates in the world, especially for manufacturers. And higher corporate rates reduce economic growth, including reduced international competitiveness.
Unfortunately, both political parties have embraced the view that any corporate tax reform plan should be revenue neutral, which by definition means that the effective rate for corporations in the United States, on average, would remain unchanged. Reform advocates argue that this will be pro-growth because of the elimination of economically distorting tax incentives (more on this below).
Meanwhile, many Republicans don’t want a lower effective corporate rate because they rightly understand it will increase the pressure to increase taxes on individuals, while many Democrats don’t want to cut the effective corporate rate because they fear it will mean reduced spending on things like entitlements. But without a cut in the actual amount of tax corporations, especially manufacturers pay, the economic benefits to the U.S. economy will be limited.
Moreover, keeping to the straightjacket of revenue neutrality will mean elimination of deductions, credits and other incentives in the code. While some of these incentives can likely be jettisoned with little or no harm, and perhaps even overall economic gain, at least three will likely come not only at the expense of growth and competitiveness, but also manufacturing health.