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Notre Dame Expert Brad Badertscher: Corporate tax overhaul doesn’t go far enough

by Shannon Chapla

February 22, 2012

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As the Obama administration prepares to propose an overhaul of the federal tax code for corporations, Brad Badertscher, assistant professor of accountancy in the University of Notre Dame’s Mendoza College of Business, says “I don’t think this goes far enough” and points out that the corporate tax rate and individual tax rate both impact the amount of taxes paid by U.S firms. 

“The Obama administration proposed lowering the top income-tax rate for corporations to 28 percent from 35 percent, which despite the decrease would actually raise overall tax revenue by eliminating dozens of deductions in an effort to restructure the corporate tax code,” Badertscher says. “The new proposal would offer new tax benefits for U.S. manufacturers, while raising taxes on U.S. companies with large operations in other countries. 

“Despite the proposed decrease to 28 percent, the U.S. would still be above the average world corporate tax rate which is closer to 25 percent. Therefore it is unclear how this new proposal would allow U.S firms to be more competitive in the world if on average the amount of taxes paid by U.S firms is actually going to increase and the tax rate is still higher than most other countries. Overall, lowering the tax rate for U.S. corporations seems like step in the right direction but with the elimination of popular deductions the proposal actually increases the average amount of taxes paid by corporations.” 

Badertscher also points out that another issue that needs to be considered is that over 60 percent of U.S. companies with $1 million or more in profits are structured as pass-through entities. “This means that the owners of these businesses pay taxes based on ordinary income tax rates and not on corporate tax rates. As a result, this new proposal has little impact on these politically power companies that are likely creating a large percentage of jobs in the United States.

“As a matter of fact, the recent individual tax rate proposals by the Obama administration likely raise the tax rate on these pass-through entities by increasing the tax rate on wealthy individuals. So if one considers the total impact of the recent Obama proposals, taxes paid by U.S corporations is actually going to go up and the taxes paid by businesses structured as pass-through entities are also likely to increase. 

“Given the current state of the U.S. economy, it is unclear that raising taxes paid by U.S firms will spur new investment and increase the flow of capital needed to create jobs. 

“Finally, both parties seem to agree that the corporate tax code needs revamped, but the current gridlock on Capitol Hill makes it less likely anything will get accomplished this year. However, the debate about how best to tax both individuals and corporations will continue to be a hot topic as we head into the fall election.”

Contact: Brad Badertscher, 574-631-5197 or bbaderts@nd.edu