I know you have all been waiting in breathless anticipation of part 2 of my evaluation of Mitt Romney's tax plan(s). Well, wait no longer! Pull up your beverage of choice (you know, the one that helps you stay awake) and join me for an exciting conclusion. You can read part one here.
Today we discuss Governor Romney's plans for corporate taxes. These are taxes paid by businesses which are organized as corporations. I should note that this is probably most "big businesses" that are household names, but not all businesses are organized as corporations. Your local businesses down the street may operate as partnerships or pass-through entities, and they are taxed based on the individual tax rates of those who own them. So this tax plan would not apply to them.
[Begin tangent] Some people have a problem with taxing corporations because they view it as double taxation - the income is taxed once when it is earned by the corporation and again when it is distributed to shareholders in the form of dividends. Suffice it to say, I do not really buy this argument, because I think corporations (while not people, ahem, Governor Romney) do need to contribute to society, and the benefits they enjoy (an educated workforce, enforcement of contracts by law, a highway system, among others) are all things that they should pay for. But we will assume for purposes of this post, that corporate taxation is likely to continue to exist [End Tangent].
Governor Romney's corporate tax plan has four parts, let's examine each of them.
Part One: "Cut the corporate rate to 25%." My question: why? The top statutory rate is currently 35%, but VERY few corporations actually pay tax at this rate. There are so many ways around this that corporate taxes paid are actually significantly lower than the relatively high rate would suggest. Why make a low rate even lower? What loopholes are you going to close to make this possible? Lowering the rate will lower the amount of tax collected, so you've got to offset that by stopping some of the tax breaks to industries that are favored in the current tax system. Governor Romney's website doesn't elaborate on this, but he needs to find a way to pay for this.
Part Two: "Strengthen and make permanent the R&D credit." The R&D credit is a tax credit that reduces the tax bill of companies that invest in Research and Development in the U.S. by building labs and employing engineers and scientists here. This makes sense to me, and I agree with this - having an research & development credit encourages businesses to build labs and employ people in this country, and encourages innovation. If companies are going to make a multi-million dollar investment, they want the certainty that this tax credit will be available to them over the long term. Right now the R&D credit is haphazardly renewed whenever Congress can find the time to do it on a year-by-year basis. A long-term R&D credit would, I think, be a good idea. President Obama has also signed on to this - so they actually do agree on something!
Part Three: "Switch to a territorial tax system." I'm conflicted about this. Currently the U.S. is one of the few countries which employs a worldwide tax system. That is, if you are incorporated (organized) in the U.S., you eventually pay tax on your worldwide income. You can keep profits offshore, but when they are repatriated (i.e. brought back to the U.S.) you pay tax. People argue that the U.S. is unfairly burdening corporations with U.S. taxes on their worldwide income. However, through tax accounting magic (stupid tax accountants!), many companies can hide income that really relates to the U.S. offshore, so it's argued that it should all be taxed in its "home" country. This one I'm holding out as undecided, but until we can come up with a system that better allocates income between countries, I'm going to be skeptical of any "tax holiday" that lets companies bring back money to the U.S. and skip the taxes due.
Part Four: "Repeal the Corporate Alternative Minimum Tax." The AMT, as its known, is levied at a lower rate than regular taxes but requires companies to addback certain items - so if a company isn't paying regular tax in a year, it may very well have to pay a little bit of AMT. This is a disagree from me, which is surprising because I am all for getting rid of the individual minimum tax. However, I think that the corporate AMT requires corporations to pay at least a little bit of tax in most years. As I noted above, I think corporations get a lot of advantages in our society, and they should pay the price for these benefits. Corporate AMT provides a carryforward benefit - so if you pay AMT, and in the future your tax bill rises above the AMT threshold, you get to reduce tax in future years. What can I say, I'm a Democrat who has an inherent anti-corporate bias, so I'm okay with the corporate AMT. Let the hypocrite allegations begin.
So overall, somewhat of a mixed bag on taxes for Romney. Both candidates, however, need to do a better job of explaining the costs and benefits of their tax policies - for every tax "goodie" we receive (or someone else receives) there is a cost - usually higher rates overall. Obama and Romney need to have a frank discussion of trade-offs. Sigh. Why do I feel like an intelligent conversation is the LAST thing that's going to happen this election cycle?
Today we discuss Governor Romney's plans for corporate taxes. These are taxes paid by businesses which are organized as corporations. I should note that this is probably most "big businesses" that are household names, but not all businesses are organized as corporations. Your local businesses down the street may operate as partnerships or pass-through entities, and they are taxed based on the individual tax rates of those who own them. So this tax plan would not apply to them.
[Begin tangent] Some people have a problem with taxing corporations because they view it as double taxation - the income is taxed once when it is earned by the corporation and again when it is distributed to shareholders in the form of dividends. Suffice it to say, I do not really buy this argument, because I think corporations (while not people, ahem, Governor Romney) do need to contribute to society, and the benefits they enjoy (an educated workforce, enforcement of contracts by law, a highway system, among others) are all things that they should pay for. But we will assume for purposes of this post, that corporate taxation is likely to continue to exist [End Tangent].
Governor Romney's corporate tax plan has four parts, let's examine each of them.
Part One: "Cut the corporate rate to 25%." My question: why? The top statutory rate is currently 35%, but VERY few corporations actually pay tax at this rate. There are so many ways around this that corporate taxes paid are actually significantly lower than the relatively high rate would suggest. Why make a low rate even lower? What loopholes are you going to close to make this possible? Lowering the rate will lower the amount of tax collected, so you've got to offset that by stopping some of the tax breaks to industries that are favored in the current tax system. Governor Romney's website doesn't elaborate on this, but he needs to find a way to pay for this.
Part Two: "Strengthen and make permanent the R&D credit." The R&D credit is a tax credit that reduces the tax bill of companies that invest in Research and Development in the U.S. by building labs and employing engineers and scientists here. This makes sense to me, and I agree with this - having an research & development credit encourages businesses to build labs and employ people in this country, and encourages innovation. If companies are going to make a multi-million dollar investment, they want the certainty that this tax credit will be available to them over the long term. Right now the R&D credit is haphazardly renewed whenever Congress can find the time to do it on a year-by-year basis. A long-term R&D credit would, I think, be a good idea. President Obama has also signed on to this - so they actually do agree on something!
Part Three: "Switch to a territorial tax system." I'm conflicted about this. Currently the U.S. is one of the few countries which employs a worldwide tax system. That is, if you are incorporated (organized) in the U.S., you eventually pay tax on your worldwide income. You can keep profits offshore, but when they are repatriated (i.e. brought back to the U.S.) you pay tax. People argue that the U.S. is unfairly burdening corporations with U.S. taxes on their worldwide income. However, through tax accounting magic (stupid tax accountants!), many companies can hide income that really relates to the U.S. offshore, so it's argued that it should all be taxed in its "home" country. This one I'm holding out as undecided, but until we can come up with a system that better allocates income between countries, I'm going to be skeptical of any "tax holiday" that lets companies bring back money to the U.S. and skip the taxes due.
Part Four: "Repeal the Corporate Alternative Minimum Tax." The AMT, as its known, is levied at a lower rate than regular taxes but requires companies to addback certain items - so if a company isn't paying regular tax in a year, it may very well have to pay a little bit of AMT. This is a disagree from me, which is surprising because I am all for getting rid of the individual minimum tax. However, I think that the corporate AMT requires corporations to pay at least a little bit of tax in most years. As I noted above, I think corporations get a lot of advantages in our society, and they should pay the price for these benefits. Corporate AMT provides a carryforward benefit - so if you pay AMT, and in the future your tax bill rises above the AMT threshold, you get to reduce tax in future years. What can I say, I'm a Democrat who has an inherent anti-corporate bias, so I'm okay with the corporate AMT. Let the hypocrite allegations begin.
So overall, somewhat of a mixed bag on taxes for Romney. Both candidates, however, need to do a better job of explaining the costs and benefits of their tax policies - for every tax "goodie" we receive (or someone else receives) there is a cost - usually higher rates overall. Obama and Romney need to have a frank discussion of trade-offs. Sigh. Why do I feel like an intelligent conversation is the LAST thing that's going to happen this election cycle?
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