Photo: CBS News
This post originally appeared at CBS Moneywatch. The White House is proposing to cut corporate income taxes from 35 per cent to 28 per cent. President Obama also recommends that manufacturers get a further cut, to 25 per cent, and he wants to impose a minimum rate on foreign earnings to discourage the use of tax shelters. There would be other less substantive changes as well under his plan.
The cut in the statutory tax rate, however, may not have as large an effect on the corporate sector as many anticipate. The reason is that this is intended as a revenue neutral change in taxes. To accomplish revenue neutrality, the cut in the tax rate will be accompanied by closing loopholes, i.e. a broadening of the base. Thus, every company receiving a tax break will be matched somewhere else by companies experiencing a tax increase. Thus, while some firms will benefit, others will get hit harder by these taxes and the net effect overall should be roughly a wash.
Another way you think about this, as noted by Jared Bernstein, is to consider the difference between the statutory tax rate — the rate on the books — and the effective tax rate, the rate after all deductions, loopholes, etc. have been exploited.