On February 22, 2012, President Obama released a proposal to lower the corporate tax rate from 35 percent to 28 percent, while also eliminating loopholes in the tax code. Considering that the effective corporate tax rate of 34.6 percent in the U.S. is the highest rate in the Organization for Economic Cooperation and Development (OECD) and is nearly 50 percent higher than the OECD average, a move to a lower rate is long overdue. Unfortunately, the devil in the White House’s plan lies in the details.

Instead of summarily eliminating loopholes across the board, the president’s framework cuts the tax rates on manufacturing income and income from advanced manufacturing, while increasing taxes on the oil and gas, small aircraft manufacturing, and insurance industries. And if this picking of winners and losers wasn’t enough of a flaw, President Obama’s plan would implement a minimum tax on American companies doing business abroad, yet lower taxes on foreign multinationals operating in the U.S. The president’s stated goal is to prevent U.S. companies from outsourcing around the world. However, as a February 24, 2012 article in the Wall Street Journal points out, considering that the U.S. is one of the few advanced countries that taxes businesses on profits earned abroad and that roughly 80 percent of global business is conducted overseas, it is uncertain how this tax would help to make American companies more competitive.

Despite the potential benefits to some companies, many business groups did not wait long to come out in opposition to the president’s proposal. In response to the release of the plan, U.S. Chamber of Commerce President Thomas Donahue stated, “It’s appropriate for the White House to acknowledge that the corporate tax code stifles economic growth, undermines the competitiveness of U.S. firms, and needs reform. However, we will be forced to vigorously oppose pay-fors that pit one industry against another or lavish favors on some while punishing others.” It is bad public policy for certain industries to be punished with higher taxes simply because they are not favored by the Obama administration.

Further expanding on this point, the February 24 article in the Wall Street Journal pointed out that “The oil and gas industry has led manufacturers in job creation for four years and already pays at or near the highest effective federal tax rate of any industry. Yet the President's tax plan raises its taxes but retains (as best we can tell) the credits and other giveaways to his supporters in green energy.” To the non-partisan observer, President Obama appears to be punishing successful companies and using the revenues extracted from them to push forward his political agenda.

Congressional Republicans should be receptive to President Obama’s desire to lower the overall corporate tax rate, but should insist that loopholes be eliminated across the board. The president’s proposal could be further improved through the addition of a repatriation tax holiday, under which U.S. multinationals could bring home profits held abroad at a one-time lower tax rate. Legislative proposals include Sens. John McCain’s (R-Ariz.) and Kay Hagan’s (D-N.C.) Foreign Earnings Reinvestment Act (S. 1671), which would reduce the repatriation tax rate from 35 percent to 8.75 percent over one year. This shift would encourage firms that have moved headquarters abroad in the face of high corporate tax rates to bring more than $1 trillion back to the U.S. S. 1671 would also drop the repatriation tax rate to 5.25 percent for companies which expanded their payrolls during 2012.

A November 2010 report by the OECD found that “corporate taxes are the most harmful type of tax for economic growth.” Furthermore, when Japan lowers its corporate tax rate on April 1, 2012, the United States will have the highest corporate tax rate in the developed world. Instead of losing business investment to other nations, the U.S. should decrease the corporate tax rate, stimulate economic growth and investment, and create jobs at home.

-- P.J. Austin