|"Only dull people are brilliant at breakfast"
|"The liberal soul shall be made fat, and he that watereth, shall be watered also himself."
-- Proverbs 11:25
President Obama will ask Congress to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, down from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent, a senior administration official said on Tuesday.
The administration plan to revamp a corporate code that is widely derided as inefficient and anticompetitive has been in the works at Treasury for two years, and is a priority of Mr. Geithner. Yet he has been preoccupied with crisis management, and is unlikely to see the project through since he plans to leave office after this year.
The proposed overhaul “will help level the playing field for businesses and allow the government to collect needed revenue while promoting economic growth,” Mr. Geithner told a Congressional committee last week, without details.
Republicans and business groups complain that the 35 percent corporate tax rate is among the highest in the world, leaving American companies at a competitive disadvantage. They typically seek a 25 percent rate, with many of them saying that the current tax breaks should be kept in place as well.
Nonpartisan tax analysts consistently find that corporations here on average pay just slightly more than their competitors in other developed countries after exploiting the many tax breaks and loopholes. Recent news accounts have highlighted the low effective rates paid by companies like Google, Boeing and General Electric.
One analysis concluded that 115 of the 500 companies in the Standard and Poor’s stock index paid a total corporate tax rate — federal and otherwise — of less than 20 percent over a five-year period. A study by the Government Accountability Office in 2008 found that 55 percent of American companies paid no federal income taxes during at least one year in a seven-year period it studied.
“Under the current tax system, the United States will soon have the highest statutory corporate tax rate among developed countries, within a system that features a large number of tax expenditures for special interests,” said a senior administration official, who did not want to speak ahead of Mr. Geithner except on condition of anonymity.
“This puts American businesses — especially those in areas like manufacturing that are subject to more intense international competition — at a disadvantage. And this system is also unnecessarily complicated for America’s small businesses.”
The problem is that not all small businesses are created equal. Businesses just getting off the ground contribute most of the country's job growth, but older small businesses cut as many as they add.
Think Bill Gates and Paul Allen huddled together late nights developing Microsoft, not the corner liquor store.
"I don't want to pick on dry cleaners and restaurants and small manufacturing firms, but they're not a big source of job creation," says John Haltiwanger, an economist at the University of Maryland.
Politicians like to say that small companies create two of every three jobs in a given year. That's less impressive when you consider that almost all the 6 million companies in the U.S. — 99.9 percent of them — are small businesses, with fewer than 500 workers.
What's more, two-out-of-three masks the fact that most small businesses eliminate more jobs than they create in a given year, either through layoffs, closings or bankruptcy.
And many of the rest, the ones that don't shrink or shut down, don't offer much hope for the millions of Americans looking for jobs.
Many small companies — outfits like florists, hardware stores and barbershops — tend to grow with the U.S. population, not faster. So they don't speed the economic recovery the way an exploding new industry might.
According to an August study by two University of Chicago economists, most small business owners just want to be their own boss and never expect to hire more than a few employees.
In fact, the more you study the numbers, the more you wonder what the politicians are getting so excited about.
Haltiwanger and two other economists showed, in a study of millions of companies over 30 years, that small businesses no more than five years old — that's about 40 percent of them — are the only ones that create more jobs each year than they cut.
In 2005, for instance, more than 99 percent of the 2.5 million net new private-sector jobs in the United States came from these startups, according to the U.S. Census Bureau.
But the 60 percent of small businesses that have been around more than five years act as a slight drag on the number of jobs available in the United States. They have cut about 0.5 percent more staff than they have added in a typical year, according to Haltiwanger.
By contrast, big businesses, the ones that get all the headlines for layoffs, have hired more than they have cut — about 0.1 percent in a typical year.
Economist Charles Kenny of the New America Foundation, a nonpartisan research group, goes as far as suggesting that Washington should stop offering certain incentives to small business owners, such as loan guarantees and write-offs on taxes for home offices. He says the money would be better spent subsidizing research and development.