Judging Barack Obama's Bout with the Tax Havens

Barack Obama's proposal to close foreign loopholes on the corporate income tax does not, alas, lend itself to to easy agitprop. (Even more so than usual, because the full details of the plan won't be released until Friday.) But it's the first big showdown between the administration and the business lobby (or is it the 17th?), and there is a fat chunk of federal revenue at stake. So what's in Obama's proposal? And is it a good idea?

Obama's tax proposal does three basic things:

First, it closes a bunch of loopholes related to the taxation of foreign corporate income. (I described the two biggest of those loopholes in a previous post, and won't get into them again.) Second, it cracks down on the use of tax havens by individuals. And third, it proposes using some of the revenue from the first two items to make permanent a national tax credit for research and experimentation.

The third item is not really substantive: The tax credit in question get renewed every year anyway. And the second item isn't really controversial: It's about finding a better way to enforce individual tax laws that are already on the books. Who opposes that? Ah, but that first item -- closing those corporate tax loopholes -- is both substantive and controversial.

But the controversy doesn't really stem from a philosophical defense of the loopholes in question: It has to do with fears about international competition. The worry is that if more American companies are opposed to the corporate income tax, they will be at a competitive disadvantage in the global marketplace. I think those fears are valid -- the American corporate tax rate is high -- but make the perfect the enemy of the good.

The US corporate tax has a narrow tax base and a high top rate -- it's burdensome, but few companies pay it. It would be better to have a tax structure with a wide base and a lower top rate. The Obama proposal gets us halfway across the river: The base will be wider, but the rate remains the same. It's not hard to see why big business would be upset. But instead of opposing what is obviously a move in the right direction, why don't businesses lobby for a lower rate? A full overhaul of the corporate tax should be what we aim for. And, via Matt Yglesias and Ezra Klein, I see that's what at least some members of the administration have in mind.

But a worrying question that looms over all of this is whether or not the rule change will be easily enforceable. Daniel Shaviro, who probably knows more about corporate tax law than anyone else, made a good point about this on his blog yesterday:

When we impose business taxes on legal entities such as corporations, rather than directly on individuals, we can only impose the U.S. tax rate, for investment abroad, on companies that are classified as U.S. residents. Unfortunately, corporate residence is an extremely weak reed for the imposition of U.S.-level rather than tax haven-level taxes. For new investments (as distinct from those already out there, which are hard to shift without paying a tax price), it is quite easy for investors to use non-U.S. entities.

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Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism. He was previously a fellow at The Atlantic and an editor at The Guardian. More

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism, an economics blog that was recently published in book form by Simon and Schuster. He was previously a fellow at The Atlantic and an editor at The Guardian. He is also on Twitter.

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