How Will Obama’s Corporate Tax Proposal Affect Your Investments?

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Here’s another smart post from our friends at Kapitall. Check it out:

President Obama has proposed corporate tax cuts that will lower corporate income taxes from 35% to 28%, and will be even lower for manufacturers.

In exchange for lower tax rates, he intends to close off a number of loopholes, exemptions and subsidies that have allowed companies to dodge taxes for decades.

Loopholes

Corporate income taxes are quite fascinating in the sheer amount of loopholes available to the corporations savvy enough to use them.

Barack Obama tax proposal

So much so that many multi-million and billion dollar corporations often end up paying negative taxes, meaning they received money back from the government. In several cases, corporations have owed less on income taxes than what their CEO earns in a year.

Indeed, Obama is working to close the gap between the statuary tax rate (the rate on the books) and the effective tax rate (what is actually paid after all loopholes, deductions and subsidies are accounted for). As an example, he will try to impose a minimum rate on foreign earnings to discourage the use of tax shelters.

Revenue Neutral

But will the plan to overhaul the corporate tax system work? Some critics are arguing that, although it may be a good idea in theory, it won’t do much good in practice. In fact, as far as economic sense goes, it’s actually a revenue neutral change.

Mark Thoma, columnist for The Fiscal Times, explains: “To accomplish revenue neutrality, the cut in the tax rate will be accompanied by closing loopholes, i.e. a broadening of the base. Thus, every company receiving a tax break will be matched somewhere else by companies experiencing a tax increase. Thus, while some firms will benefit, others will get hit harder by these taxes and the net effect overall should be roughly a wash.”

Business Section: Investing Ideas

If Obama’s tax proposal is passed, and the laws are strict enough to close the gap between the statutory and effective tax rate, some companies are going to be in for a nasty shock.

Specifically, we considered the companies that have paid essentially nothing, or even received money from the government. To do so we look backed at a list of 25 CEOs who earned more than their company paid in income taxes in 2010. You can probably assume that 2011 income taxes will be filed with similar results. The list was originally compiled by the Institute for Policy Studies.

Here are the 25 major corporations that paid their CEO more than they paid in federal income taxes. What kind of hit do you think they will take if their loopholes and discounts are closed off?

Read on to see Kapitall’s picks.

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Photo credit: Allison Harger/Flickr