Corporate Taxation Proposal 3: Government

For my last proposal, I looked at the government side of the issue. Corporate taxation is a highly important issue in politics right now, especially because it will play a part in any upcoming budget changes. The Bush Era Tax Cuts are set to expire at the end of the year, and as the fiscal cliff looms closer, corporate tax reform (CTR) will certainly be up for debate.

Currently, there main argument from government officials is that loopholes in the tax code should be closed, and the rate lower to entice corporations to do business in America. For the most part this is supported by businesses too. In Ways and Means Hearings during the 112th congress, employers agreed that they would prefer a lower tax rate in exchange for closing loopholes [2]. The main reason is that having a solid tax rate makes it easier to project future financial information. While loopholes allow for some corporations to actually receive a tax benefit, they are by nature inconsistant and are difficult to predict.

A lower corporate tax rate would create jobs in America and draw other corporations to do business in the United States.

The Joint Committee on Taxation has cited the difference between accounting methods used in financial reporting and calculating taxable income as the biggest cause of disparity in corporate tax rates. Permanent differences like tax-exempt bonds, nondeductible meals and entertainment, fines and penalties, and compensation in excess of tax-deductible limits are all included in calculating net income, but do not count towards their taxable base [1].

The Joint Committee on Taxation also claims that the current tax code is too strict on corporations. The committee argues for looser rules on expensing  corporations to expense investments. This allows corporations to make capital investments without being taxed. Policies like this will help bolster economic growth.

These policies are mostly republican ideas that follow “trickle-down economics”, focusing on giving corporations break in hopes that they will increase employment. The democrats argue that corporations should be paying more money and tax breaks should be increased for the middle class.

The democrat and republican solutions are (surprisingly) in opposition. Its hard to say which side is correct because they both rely on different economic theories. Regardless of whether corporations should have a higher or lower tax rate, both sides agree that loopholes should be closed. I think that businesses will support this idea as it makes income much more predictable when you know exactly how much the corporations will be taxed and dont have to rely on hunting down loopholes and tax breaks.



[1] Present Law and Background Relating to Corporate Tax Reform

[2] Ways and Means on CTR




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