In what may be viewed as a potential godsend to corporations or a desperate bid to bolster sagging poll results, Republican presidential candidate Rudolph Giuliani said Thursday that he wants to lower the corporate tax rate by a whopping 10 percentage points, all the way down to 25 percent.
“Ensuring lower, more competitive corporate tax rates will solidify a strong and growing economy that creates jobs for Americans,” read a statement on joinrudy2008.com, a website paid for by the Rudy Giuliani Presidential Committee. “America’s effective corporate tax rates are among the highest in the world.”
Giuliani’s tax proposal also would preserve the 2001 and 2003 tax cuts enacted by President Bush, eliminate the estate tax, and give taxpayers the option of choosing a simplified tax form with three tax brackets with a maximum bracket of 30 percent.
The former New York City mayor clearly is trying to come more in line with his fiscally conservative Republican rivals. Former Arkansas Gov. Mike Huckabee, for example, is promoting a plan to replace income taxes altogether with a 23 percent “consumption tax.”
Giuliani’s proposal also further divides him from the leading Democratic contenders, all of whom in recent weeks have railed at what they deem to be excessive profits generated by some of the most successful corporations in the United States.
However, there is always a theoretical basis for drastically reducing tax rates, posits Robert Willens, a Lehman Brothers tax expert. For example, the supply-side school of economics is premised on the fact that reductions in tax rates stimulate economic activity, he notes. That means the increased activity leads to higher profits and taxable income and, therefore, tax revenues. So, the tax cuts pay for themselves, say proponents of the concept. “But, there is still much debate, as I understand it, as to the currency of this theory,” Willens says.
One important effect of lowering the tax rate to 25 percent is that the companies with net deferred-tax liabilities that have been established using a 35 percent tax rate would be able to write down those liabilities (and record an equivalent amount of income), Willens told CFO.com. That’s because, under Giuliani’s plan, those liabilities would only “settle” at a 25 percent rate. “Thus, most of Corporate America would see an immediate and sizable boost to income and equity simply as a result of re-valuing their deferred tax liabilities.”
Conversely, companies with net deferred tax assets would experience the opposite: They would have to write down those assets, and the amount of the write-down would result in a charge to income and equity, added Willens. “Most companies, fortunately, are in a net deferred tax liability position and, therefore, the effect of reducing tax rates would be largely positive,” asserted Willens.
In October, another New Yorker, Democratic Congressman Charles Rangel, also proposed sweeping changes to corporate tax rules, including a big tax cut. Rangel, who heads the powerful House Ways and Means Committee — the group most responsible for writing U.S. tax policy — submitted a plan that would slash the top corporate marginal tax rate from 35 percent to 30.5 percent.
And although Rangel did not propose an across-the-board change to the capital gains rate like Giuliani, he did address dividend deductions that corporations receive. However, unlike Giuliani’s pro-business stance, Rangel proposed to decrease the tax break for corporations. For example, for a 20-percent-owned corporation the deduction would drop from 80 percent to 70 percent. For dividends currently eligible for a 70 percent reduction, the tax break would fall to 60 percent.