Friday, January 28, 2011

More than maybe you want to know on corporate income tax

Politicians from both parties are calling for big changes to the corporate income tax.  There are two major sets of issues on the table.  As shown in this NYT article, the tax is applied very inconsistently across different sectors of the economy.  Companies exploit a wide range of tax exemptions and deductions that vary by industry.  The net result is that companies in industries such a trucking and electric utilities pay close to the maximum rate of 35%, whereas biotech, pharma and IT pay 10% or less. Economically, this means we are unduly restricting output in the high-tax sectors and subsidizing the low-tax sectors.  Mucho deadweight loss could be eliminated by equalizing tax rates across all sectors.  Of course the politics of this are dicy; no one likes for their taxes to be raised especially while others are being lowered. 

The other major issue is whether the US relies too much on the corporate income tax to fund government activities.  Some Republicans want to eliminate the corporate income tax.  Of course, if the corporate tax were scaled down, some other tax would probably have to go up unless radical steps are taken to cut spending -- which is not too likely with split government in Washington.  My guess is that this talk will die down quickly.  "Cut deadweight loss by reforming the corporate income tax" is not likely to pave anyone's way to the presidency in 2012. 

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