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Rangel's plan to upset the tax planning applecart

November 17, 2008

Ways and Means Committee Chairman Rangel is moving ahead with a proposal to reduce the top corporate tax rate to 28%. NYU Lawprof Daniel Shaviro comments:

A few points to keep in mind here: First, cutting the corporate rate and broadening the base is generally an unambiguously good idea (keeping in mind, however, that for outbound investment this depends on whether a worldwide tax is optimal, as seems unlikely given its resting on the weak reed of corporate residence).

Second, a fully financed domestic corporate rate cut (i.e., not necessarily financed by corporate base-broadening) is also highly likely to be a good idea in the setting of worldwide tax competition.

Third, even if the effective tax rate paid by U.S. companies on domestic investment is low, a high marginal rate is still a problem - not just for the general reasons why base-broadening plus rate-cutting is desirable, but also because in various cases it will be the marginal rate, not the effective rate, that drives particular decisions in the realm of worldwide tax competition.

Sometimes I wonder whether Dr. Shaviro is so shrill in his anti-Republican politics because it gives him cover to say sensible things about tax policy in Manhattan.

A reduced corporate rate makes sense for a host of reasons. In an ideal world it would be accompanied by an individual tax rate cut and base-broadening. When you have a corporate rate much lower than the individual top rate, you build in all sorts of incentives to play games with income allocations. That's great for those of us who charge for tax advice, but it creates a lot of wasted effort and time-wasting tax arbitrage.

Speaking of charging for tax help, Rep. Rangel has engaged forensic accountants to help him repair his tax returns for recent decades. It can't be cheap. It sure wouldn't be if I were quoting the work.

There's more on the Rangel plan at the Tax Lawyer's Blog.

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