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Can you cut corporate rates while raising individual rates?

October 12, 2009

The U.S. has the second highest corporate tax rate in the OECD. There is a growing sentiment to reduce the U.S. corporate rate to make U.S. businesses more competitive. TaxVox notes some practical problems with doing so, especially as individual rates go up:

President Obama’s interest in raising the top rate on wealthy individuals only increases the challenges. If we cut the corporate rate from 35 percent to, say, 25 percent but at the same time raise the top individual rate from 35 percent to something over 40 percent…well, you can see the problem. Many high earners will turn themselves into corporations to dodge the higher individual rate.

TaxVox notes another problem with corporate reform:

Is corporate tax reform likely to happen? Nope. And the sticking point won’t just be populists who resist lower corporate rates. It also will be those businesses who paid good money for the messy tax system we have. As long as they oppose efforts to close the special interest tax benefits that so benefit their own bottom lines, the U.S. will be stuck with a corporate tax rate that is far higher than our international competitors.

Can you say "research credits"?