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Editorial: Compromise to encourage growth

BY DI EDITORIAL BOARD | JULY 31, 2013 5:00 AM

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On Tuesday, President Obama outlined his proposal for a compromise on the economy that would lower corporate tax rates and increase spending on infrastructure projects and funding for community colleges.

The proposal would lower the corporate income-tax rate from 35 percent to 28 percent (25 percent for manufacturers) and would introduce a minimum tax on profits held overseas to discourage the use of corporate tax havens to skirt the IRS. The plan would also include some kind of one-time fee to repatriate money currently held outside the United States.

The revenues accumulated by these tax policies would be spent on infrastructure and to promote manufacturing and education in an effort to put some unemployed Americans back to work.

The prospect of a less onerous corporate tax system and a renewed investment in American infrastructure are too enticing to write off as a partisan gimmick; Congress should get to work on such a deal.

The negative economic effects of a high corporate tax rate are well documented. According to a report from the Organization for Economic Cooperation and Development, corporate taxes “can be expected to be the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and in productivity improvements.”

The corporate tax rate in the United States is one of the highest in the world, which has led many companies to keep their profits outside the country. A report from Citizens for Tax Justice estimates that 18 Fortune 500 companies that disclose their offshore holdings kept approximately $283 billion in income outside the United States in the most recent fiscal year. Hundreds of billions more may be kept offshore by companies such as General Electric that don’t disclose their offshore holdings.

Obama’s proposal could bring some of that money back to the United States by easing the tax environment and actually increase corporate tax revenue, which would be reinvested in a variety of ways.

One such investment, according to the president, would be in infrastructure projects. Stories of crumbling bridges and roads across the country are commonplace — in Iowa, approximately 21 percent of the bridges are considered structurally deficient.

But bridges aren’t the only infrastructure problem the U.S. is facing. A report issued this month by McKinsey & Co., a consulting firm, found that the U.S. is spending about a third less than it should on infrastructure projects that are needed to maintain long-term economic growth.

Obama’s plan could spur short-term infrastructure investment by raising corporate tax revenue. That bump in revenue, according to a study from the Center on Budget and Policy Priorities, would likely be gone after a few years once foreign-held corporate cash is repatriated and taxed, but that revenue could be used as a short-term revenue neutral funding program until a long-term solution is found.

This plan is not an ideal long-term solution for tax reform or infrastructure spending — it ignores, for example, many small businesses that are taxed at the top individual income rate — but any steps toward a less onerous corporate tax code and pro-growth investment are welcome products of compromise.

In this plan, Congress has an opportunity to take a first step toward corporate tax reform and boost economic growth in the short- and long-term.


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