The Obama administration has proposed lowering the corporate tax rate from 35% to 28% while, at the same time, getting rid of “dozens” of special tax breaks and deductions.
Three comments on the plan. First, I think it’s great. Lowering rates and broadening the tax base is a great idea. It even has the potential, if done right, to increase tax revenues while lowering marginal rates.
Second, I hope the Obama administration does not reduce the benefits from getting rid of a lot of special interest tax breaks and deductions by replacing the old ones with new ones aimed at President Obama’s special favorites. Articles here and here list some new tax breaks that President Obama wants to grant. That is not a good sign. Just moving the tax breaks around like a giant shell game doesn’t help. We need to actually get rid of them – and keep them gone.
Third, the Administration’s plan to lower corporate income tax rates and eliminate special tax breaks is such a good idea, they ought to do it for personal income taxes, too.
A final comment on tax reform: I have mentioned before, in posts on President Obama’s desire to raise tax rates on the “rich” (i.e., couples making more than $250,000 a year and individuals making more than $200,000 a year), that the rich, and especially the really rich, won’t wind up paying all of those extra taxes the Obama administration thinks it will collect. The rich will rearrange their finances and how they get their income to minimize their taxes under the new rates. And the richer they are, the better they’ll do because they can afford the best tax lawyers and accountants.
Now, at the same time the Administration wants to increase personal income tax rates, it is proposing to cut corporate income tax rates. Which makes it clear one of the ways the rich, and especially the really rich, will avoid those higher personal income tax rates: Instead of taking income personally, they will rearrange things so that more of their income is in corporations, which pay a lower rate. Back when the top personal income tax rates were 50% and more, people arranged their affairs so they got less of their income personally and more of their income in corporations. When personal tax rates came down, this was no longer necessary. It became easier just to take income personally. If President Obama gets his way, the reverse will happen.
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