Sen. Max Baucus, a Democrat from Montana and the chairman of the Senate Finance Committee, wants to cut corporate tax rates. But he’s finding that corporations are lining up to criticize his proposal.
As it happens, they’re right to: Baucus’ misplaced priorities have resulted in an unnecessarily complicated and self-defeating plan.
There’s bipartisan support for lowering the 35 percent federal corporate tax rate, which is among the highest in the developed world. Both parties see the rate as a burden for the economy because it pushes investors — American and foreign — to seek their returns in other countries. Economists argue that the tax therefore depresses wage growth in the United States, a claim supported by numerous studies.
Yet business lobbyists are still complaining, for several reasons. The details of Baucus’ plan involve adding complexity to the tax code. It’s vague about where the rate would end up, aiming to get it somewhere below 30 percent. And it doesn’t make the clean shift that some activist groups (and economists) favor away from “worldwide” and toward “territorial” taxation.
The U.S., unlike most countries, taxes multinational companies based here on all their income as soon as it enters the country, regardless of where it was made. Most countries tax these companies on the income they make inside their territory. The Baucus plan generally moves away from territorial taxation, imposing significant levies on income before it even enters the country.
These features are not, however, the plan’s main defect. To pay for the reduction in the tax rate, the Baucus plan slows the rate at which companies can write off the cost of investment. This trade-off may have been made merely to get the numbers to work, but its effect is to favor past investments over future ones.