Bloomberg: Obama to announce corporate tax cut

[Winehole23]

The Obama administration will propose today reducing the U.S. corporate tax rate to 28 percent from 35 percent along with removing tax breaks for companies to help offset lost revenue, an administration official said.
The plan would eliminate dozens of tax breaks and reshape the current manufacturing deduction to reduce the tax rate on manufacturing to 25 percent, according to the official, who outlined the proposal on condition of anonymity because it hadn’t been released. The restructured tax code would still include incentives for research and development and renewable energy.
http://www.bloomberg.com/news/2012-02-22/obama-to-ask-congress-to-lower-corporate-tax-rate-to-28-remove-loopholes.html

[Halberto]

not that surprised really

If he's going to put tax payers dollars in stupid amounts to renewable energy he should help out struggling corporations.

[Winehole23]

http://online.wsj.com/article/SB10001424052970204662204577199492233215330.html

[Winehole23]

http://www.nytimes.com/2011/01/09/weekinreview/09powell.html?pagewanted=all

[DarrinS]

What's the rationale? I thought these private-jet-owning billionaires and zillionaires weren't paying their fair share.

[Winehole23]

Maybe this will loosen their death grip on their own wallets, perhaps even in time for the election this fall.

[elbamba]

http://online.wsj.com/article/SB10001424052970204880404577225493025537660.html?m od=WSJ_hp_LEFTTopStories

President Obama's 2013 budget is the gift that keeps on giving—to government. One buried surprise is his proposal to triple the tax rate on corporate dividends, which believe it or not is higher than in his previous budgets.

Mr. Obama is proposing to raise the dividend tax rate to the higher personal income tax rate of 39.6% that will kick in next year. Add in the planned phase-out of deductions and exemptions, and the rate hits 41%. Then add the 3.8% investment tax surcharge in ObamaCare, and the new dividend tax rate in 2013 would be 44.8%—nearly three times today's 15% rate.

Keep in mind that dividends are paid to shareholders only after the corporation pays taxes on its profits. So assuming a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on corporate earnings passed through as dividends would be 64.1%.

In previous budgets, Mr. Obama proposed an increase to 23.8% on both dividends and capital gains. That's roughly a 60% increase in the tax on investments, but at least it would maintain parity between taxes on capital gains and dividends, a principle established as part of George W. Bush's 2003 tax cut.

With the same rate on both forms of income, the tax code doesn't bias corporate decisions on whether to retain and reinvest profits (and allow the earnings to be capitalized into the stock price), or distribute the money as dividends at the time they are earned.

Of course, the White House wants everyone to know that this new rate would apply only to those filthy rich individuals who make $200,000 a year, or $250,000 if you're a greedy couple. We're all supposed to believe that no one would be hurt other than rich folks who can afford it.

The truth is that the plan gives new meaning to the term collateral damage, because shareholders of all incomes will share the pain. Here's why. Historical experience indicates that corporate dividend payouts are highly sensitive to the dividend tax. Dividends fell out of favor in the 1990s when the dividend tax rate was roughly twice the rate of capital gains.

When the rate fell to 15% on January 1, 2003, dividends reported on tax returns nearly doubled to $196 billion from $103 billion the year before the tax cut. By 2006 dividend income had grown to nearly $337 billion, more than three times the pre-tax cut level. The nearby chart shows the trend.

Shortly after the rate cut, Microsoft, which had never paid a dividend, distributed $32 billion of its retained earnings in a special dividend of $3 per share. According to a Cato Institute study, 22 S&P 500 companies that didn't pay dividends before the tax cut began paying them in 2003 and 2004.

As former Citigroup CEO Sandy Weill explained at the time: "The recent change in the tax law levels the playing field between dividends and share repurchases as a means to return capital to shareholders. This substantial increase in our dividend will be part of our effort to reallocate capital to dividends and reduce share repurchases."

And that's what happened. An American Economic Association study by University of California at Berkeley economists Raj Chetty and Emmanuel Saez examined dividend payouts by firms and concluded that "the tax reform played a significant role in the [2003 and 2004] increase in dividend payouts." They also found that the incentive for firms to pay dividends rather than sit on cash helped "reshuffle" capital from lower growth firms to "ventures with greater expected value," thus increasing capital-market efficiency.

If you reverse the policy, you reverse the incentives. The tripling of the dividend tax will have a dampening effect on these payments.

Who would get hurt? IRS data show that retirees and near-retirees who depend on dividend income would be hit especially hard. Almost three of four dividend payments go to those over the age of 55, and more than half go to those older than 65, according to IRS data.

But all American shareholders would lose. Higher dividend and capital gains taxes make stocks less valuable. A share of stock is worth the discounted present value of the future earnings stream after taxes. Stock prices would fall over time to adjust to the new after-tax rate of return. And if investors become convinced later this year that dividend and capital gains taxes are going way up on January 1, some investors are likely to sell shares ahead of paying these higher rates.

The question is how this helps anyone. According to the Investment Company Institute, about 51% of adults own stock directly or through mutual funds, which is more than 100 million shareholders. Tens of millions more own stocks through pension funds. Why would the White House endorse a policy that will make these households poorer?

Seldom has there been a clearer example of a policy that is supposed to soak the rich but will drench almost all American families.

[elbamba]

Different topic but similar subject. Hope you don't mind me adding it to your thread.

[Winehole23]

not a bit

[EVAY]

What's the rationale? I thought these private-jet-owning billionaires and zillionaires weren't paying their fair share.

Answering your first question: The links to the WSJ and NYTimes and Bloomberg (if you would bother to read them) is that reducing the overall rate from 35% to 28% but getting rid of some of the commonly used deductions would actually increase the amount of revenues collected, consistent with the Simpson-Bowles recommendations.

The second part of your quote is your apparent lack of understanding between corporations and the individuals. Obama is not recommending changes to the individual income taxes in this...only corporations.

Realizing, of course, that the SCOTUS makes no such distinction with respect to contributing to elections.

One of the articles (I forget which) also points out that 55% of U.S. corporations pay no income tax at all. A figure which I find oddly similar to the number of U.S. citizens who pay no federal income tax, and which seems to burn the hearts of so many right-wingers.

[EVAY]

^^^Virtually every one of the articles also said that there was zero chance of this happening in an election year, but that Geitner has been trying to get it done for the last two years.

So it is mostly just to take the wind out of the sails of the Republicans saying that the U.S. corporate tax rate is higher than other countries, and that is why we lost jobs. Republicans want the tax rate lowered to 25%.

Businesses want it lowered to 25% AND keep all the deductions they have now.

[Winehole23]

As we wrote yesterday, the Obama administration should be given credit for recognizing that the U.S. corporate tax system is out of step with the rest of the world and their plan to cut the rate from 35 percent to 28 percent would represent a good first step toward making the U.S. more competitive.


That said, the rest of their plan uses the tax code to promote a mercantilist and isolationist view of the U.S.'s place in the global economy. The administration is clearly distrustful of companies that do business abroad and has the mistaken notion that America can compete for the 85 percent of global business that is outside of the U.S. from the safety of our shores. Thus the plan would increase taxes on U.S. multinational companies as a means of paying for the lower corporate tax rate which will largely benefit domestic companies.
On that note, it seems very unfair that foreign companies doing business in this country would get a 20 percent tax cut but U.S. companies doing business abroad would get a tax increase. How does that help U.S. competitiveness?


Also, it is ironic that Obama is proposing a 20 percent tax cut for corporations just weeks after proposing a "Buffett rule" for high-income individual taxpayers, many of whom are pass-through businesses such as S-corporations and LLCs. Interestingly, the top corporate tax rate and the top individual tax rate are at the same level - 35 percent - for the first time in the history of the U.S. tax system. I thank that parity should be maintained, but under Obama policies we would have a 28 percent corporate tax rate and a top individual of at least 39.6 percent. Thus you would see an exodus of S-corporations flipping to C-corp status.


The plan creates a new 25 percent tax rate for manufacturing - perhaps, even a lower rate for "advanced" manufacturing. We can only imagine the feeding frenzy this would generate from lobbyists to get their industry declared manufacturing. As it is, the current "199" manufacturing deduction that was enacted in 2004, is available to architects, companies that grind hamburger, software firms, and companies that produce rap albums.

Lastly, while decrying the unfair "loopholes" in the corporate tax code, the administration is proposing a new Earned Income Tax Credit for renewable energy companies. According to the administration, renewable energy companies that are unprofitable and, thus, have no taxable income, have had to restructure themselves in order to take advantage of the current renewable production and investment credits. To remedy this, they propose making the permanent production credit "refundable" to unprofitable companies. Meaning, the IRS will cut them a check even though they don't pay income taxes, just as it does for individuals who get the EITC.


The bottom line is that Obama's corporate tax plan is the "anti-tax reform" plan. It will simply make the tax code more complex and its overall effects will largely undermine whatever benefits it delivers from a lower 28 percent corporate rate.
http://www.taxfoundation.org/blog/show/27992.html

[boutons_deux]

Corporations Don't Need a Tax Cut, So Why Is Obama Proposing One?

The Obama administration is proposing to lower corporate taxes from the current 35 percent to 28 percent for most companies and to 25 percent for manufacturers.

The move is supposed to be "revenue neutral" -- meaning the administration is also proposing to close assorted corporate tax loopholes to offset the lost revenues. One such loophole allows corporations to park their earnings overseas where taxes are lower.

Why isn't the White House just proposing to close the loopholes without reducing overall corporate tax rates? That would generate more tax revenue that could be used for, say, public schools.

It's not as if corporations are hurting. Quite the contrary. American companies are booking higher profits than ever. They're sitting on $2 trillion of cash they don't know what to do with.

And it's not as if corporate taxes are high. In fact, corporate tax receipts as a share of profits is now at its lowest level in at least 40 years. According to the Congressional Budget Office, corporate federal taxes paid last year dropped to 12.1 percent of profits earned from activities within the United States. That's a gigantic drop from the 25.6 percent, on average, that corporations paid from 1987 to 2008.

And it's not that corporations are paying an inordinate share of federal tax revenues. Here again, the reality is just the opposite. Corporate taxes have plummeted as a share of total federal revenues. In 1953, under President Dwight Eisenhower, a Republican, corporate taxes accounted for 32 percent of total federal tax revenues. Now they're only 10 percent.

But now the federal budget deficit is ballooning, and in less than a year major cuts are scheduled to slice everything from prenatal care to Medicare. So this would seem to be the ideal time to raise corporate taxes -- or at the very least close corporate tax loopholes without lowering corporate rates.

http://www.huffingtonpost.com/robert-reich/obama-corporate-tax_b_1294224.html?view=print&comm_ref=false

[Winehole23]

good optics in an election year?

[DMX7]

Jobs are a business expense that corporations would love to eliminate altogether if they could.