As the old saying goes, the road to hell is paved with good intentions. For decades various Washington politicians have tinkered with corporate income tax rules with the laudable goal of getting U.S.-based multinationals such as General Electric (GM) and IBM (IBM) to pay their "fair" share of taxes on growing overseas operations. The result has been a disaster—a system no one understands that requires vast resources to administer while raising very little revenue. The current corporate tax rules even seem to encourage U.S.-based multinationals to move jobs overseas, although no one really knows for sure.
Unfortunately, President Barack Obama's latest proposals to get U.S.-based multinationals to pay higher taxes on their foreign profits do nothing to fix these problems. The tax system will get another layer of complexity—effectively a "stimulus package" that benefits tax lawyers and accountants who find new loopholes. And to the degree that the new proposals bite, U.S.-based multinationals will find themselves at a bigger tax disadvantage compared with multinationals based outside the U.S. that operate under a different set of tax rules. In essence, the Obama proposal is a tax increase on companies headquartered in the U.S. The end result could well be fewer good jobs in the U.S.
give U.S.-based companies a break
Here's a radical idea: Obama should go the other direction, striking a blow for simplicity and jobs by reducing the corporate income tax rate from its current 35% to 25%. This is a move that has been advocated by many economists and politicians, notably Senator John McCain (R-Ariz.) last year in his Presidential campaign. But just as only a staunch Republican such as Richard M. Nixon could have opened up relations with China, a reduction in the corporate income tax may be a maneuver that can be accomplished only by a Democrat.
What are the advantages of reducing the corporate income tax? First, such a drop would give U.S.-based multinationals a leg up against foreign-based multinationals—a good thing, if you believe companies based in the U.S. are more likely to locate high-end research, planning, and marketing jobs in this country. Such a drop would further reduce incentives for corporations to contort global investment decisions in an effort to avoid taxes. In particular, opening new operations in the U.S. would immediately become more attractive.
At the same time, lowering the corporate income tax would help extricate the U.S. from a game it cannot win. In an increasingly global economy, chasing profits across national borders is a hopeless task. Indeed, when a product is designed in one country, manufactured in another, and sold in a third, it's almost impossible to figure out where profits are really being generated.
U.S. Corporate Tax Share: About 10%
In exchange for lowering the corporate tax rate, Obama should extract a big quid pro quo: The President should require that companies make their income tax returns public, at least in summary form. The financial crisis has shown us that there's too much we don't know about how the global economy operates. Being able to see corporate income tax statements would facilitate transparency and openness.
The downside of reducing the corporate income tax, of course, is that revenue would be lost in the short run. But the numbers involved would not be enormous. Over the past 10 years the corporate income tax has contributed only a bit more than 10% of federal tax receipts, on average. At worst, a cut in the corporate income tax rate from 35% to 25% would reduce total federal revenues by about 3%, and perhaps by less.
Cutting the corporate income tax would be unpopular with Obama's political base. But at a time when jobs are disappearing by the millions, raising taxes on U.S.-based multinationals is not the right way to go.
Mandel is chief economist for BusinessWeek.