Obama proposal to benefit manufacturers is yet another loophole.
The U.S. just reached No. 1. But the No. 1 highest corporate-tax rate in the world is not a coveted recognition. Japan, which previously held the top spot, lowered its rate April 1 following a global trend to increase international competitiveness by reducing corporate taxes. This trend has ignited the movement toward reform of the corporate tax in the U.S., which stands at 39.2 percent when federal and state rates are included. Earlier this spring, President Barack Obama made his proposal; however, one major provision carries serious problems: a lower rate for manufacturers.
This would create a brand new loophole to be exploited by thousands of companies who will try to define themselves as manufacturers. Consider the similarities of a Burger King restaurant and a Ford automobile plant. Each buys raw materials from a supplier, beef or steel. Then, heat is used to chemically and physically alter the materials for the final product. So is Burger King a manufacturer? Tax lawyers would have an easy case proving so.
There are many factors fomenting sentiment and special treatment for the manufacturing industry: nostalgia for industrial America, anger toward years of outsourcing and the cachet of the label “Made in America.” Furthermore, it’s no surprise to see special-interest coddling in an election year. None of these claims present economic validation for the government to favor one sector over another.
Loopholes create distortions in the market and reduce efficiency. Those unable to claim discounts face exorbitant rates as they must offset losses in revenue from deductions. Tax reform must focus on broadening the base so that the overall rate can be lowered without making drastic sacrifices in expected revenue. Though Obama’s plan generally follows this premise, creating a new loophole to placate the manufacturing vote is counterproductive, against economic rationale and should not be included.
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