Mitt Romney Economic Plan: Romney Trumps Obama on Corporate Taxes
Republicans, Democrats, and independents alike can agree that the United States corporate tax system is broken. Companies are wildly avoiding their tax obligations and exploiting loopholes, causing the government to lose out on billions of dollars of revenue.
Through the use of strategies such as the “Double-Irish” and the “Dutch-Sandwich,” multinational corporations such as Google move their profits to tax shelters in Bermuda or the Cayman Islands, to avoid taxation by the IRS. According to Bloomberg, Google’s effective tax rate is around 2.4%. A more egregious example is General Electric, which did not pay any taxes in 2010 and instead received a tax benefit from the federal government of $3.2 billion.
Three major flaws in the corporate tax system:
First, the statutory corporate tax rate of 35% (39.2% when federal and state rates are averaged) in the U.S is the highest among OECD countries. Although there were 133 major corporate tax reductions worldwide since 2006 according to a report published by the World Bank and PricewaterhouseCoopers, the U.S corporate tax rate has remained stagnant.
Second, the U.S corporate tax code is ridden with loopholes. These “tax expenditures” cost the federal government billions in potential revenue and the necessity of each is questionable.
Third, the U.S is one of the few countries that continue to use a worldwide taxation system. This means that profits earned and taxed overseas are immediately taxed again when they are brought back to the U.S., amounting to de facto double taxation. Likewise, to compete with international firms that are not subject to his law, American corporations have to make up for this deficit by raising prices, lowering wages, or avoid paying the taxes altogether, further encouraging these corporations to keep their profits abroad.
The Obama Plan:
The president’s plan takes a number of steps in the right direction. Obama aims to reduce the federal corporate tax rate from 35% to 28% to bring it closer to the average of the industrialized world. This will be accompanied by closing all tax loopholes for specific to industries with the exceptions of manufacturing, research, and clean energy. However, the Obama plan will also require companies to pay a minimum tax on overseas profits. Likewise, it does not solve the problem of the worldwide taxation system that is deterring the repatriation of profits and subsequent investment at home.
The Romney Plan:
The Romney Plan takes a similar approach to the president’s plan. Romney wants to reduce the corporate tax rate to 25% and takes into account the addition of state level corporate taxes to the federal rate. This attempts to also to make the U.S. rate closer to the norm of the industrialized world. Like Obama, Romney aims to cut loopholes and has committed to make the research and experimentation tax cut permanent. The flaw here is that Romney has yet to specify exact which loopholes will be cut. Most significantly, however, Romney plans to transition the United States to a territorial tax system. Under this system, corporations are taxed only in the country where their profits are earned and not when they are returned back the United States. This is crucial in increasing investment domestically by American corporations profiting overseas as they do not have the threat of double taxation looming over them. During this transition Romney has also pledged to enact a “tax holiday” for corporations to bring profits back to the United States.
The Romney plan’s glaring weakness is the unspecified loopholes. Nonetheless, Romney tackles the biggest issue by including a transition to the territorial tax system. In a time where the American economy desperately needs investment from its own corporations, the Romney plan’s inclusion of a lower statutory rate coupled with the switch to the territorial tax system makes it the most pragmatic and effective strategy moving forward.