Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Tuesday, June 14, 2011

Corporate tax reform can wait -- the recovery can't

In the waning days of the 111th Congress last December, an extraordinary tax deal was reached between the Obama administration, the outgoing Democratic majority, and the resurgent Republicans that extended the Bush-era tax cuts for two years in addition to unemployment benefits. The $900 billion agreement that also lowered payroll taxes by 2% for 2011 was hailed as a “second stimulus” and led to upward revisions in GDP growth forecasts.

The bill also kicked off President Obama’s efforts to reset his relationship with the business community, whose support President Obama and his strategists feel is vital to sustaining the economic recovery and, hence, his reelection prospects. The tax bill was followed up by the naming of William Daley, a former banker, as his permanent replacement for Rahm Emmanuel as chief of staff and General Electric CEO Jeffrey Immelt as the head of a new advisory board on economic recovery and job creation, and an executive order ordering the review of unjustifiably costly regulation – all major steps for an administration criticized for having had no one with business experience in the top ranks.

In his State of the Union address President Obama opened up another front in his efforts to repair ties with the business community by calling for a streamlining of the corporate tax code with a lower overall rate in exchange for reducing numerous loopholes that companies currently exploit.

As is oft-pointed out by the business community, the US has the second highest combined statutory corporate income tax among OECD nations at 39 (which includes an average of US states) – some 13 percentage points above the 2010 OECD average. But the reality is more subtle: the loopholes that are the target of President Obama’s ire mean that for some favored industries like biotechnology, the effective federal tax rate is only 4.5%, with the banking and petroleum industries also reporting effective rates of 17.5% and 11.3% respectively. The trucking industry by contrast pays an effective federal tax rate of 30.9 percent.

But two factors diminish the likelihood that reform will be achieved. First, President Obama has insisted that any corporate tax reform be revenue neutral – meaning that as a whole, business would see no cut in their taxes. (Simplification of the tax code would provide some gains for corporations in the form of savings on the costs of tax compliance.) Second, the wide variation in effective taxation by industry means that the possibility that reform would overcome the objections of industries that would be hurt by a rise in their effective tax rate (including those like biotechnology and information technology that the president has cited are vital to “winning the future”) quite unlikely.

But there exists another possibility for a addressing a feature of the obtuse US corporate tax code whose prospects for political success would be considerably higher: temporarily cutting taxes on the foreign earnings of American companies.

As the Congressional Joint Economic Committee report on tax competitiveness explains, there are two basic types of international tax systems: worldwide and territorial. In the latter, employed by most major economies including France, Japan, and Germany, companies pay taxes to their home country only for the income generated in that country. Thus, a German company pays German corporate taxes only on the income generated in Germany but will also pay French taxes only for the income earned in France.

The US is one of a handful of major countries that instead practices a worldwide system in which US-registered companies pay taxes not only on earnings from within the US but also on foreign earnings at the US rate less the taxes that they pay to the foreign countries. But US companies only encounter this tax when they repatriate these foreign earnings back to the US. Thus, unwilling to bring back their earnings from abroad by sacrificing it to the United States, corporations are holding an estimated $1 trillion overseas.

Full Article
Source: The Politic 

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