President Obama this week unveiled a plan to reduce U.S. corporate tax rates to 28 percent while changing loopholes.  Whatever welcome this receives from his political friends and foes, it is a superb first step towards the type of comprehensive tax reform we so desperately require.  It is not perfect though, and its strengths and weaknesses need mentioning.

The tax cut is important because it bumps our tax rate down from the highest in the developed world into a tie for twelfth place, along with Norway and Britain. We might have managed a more robust rate decrease; tax parity with the United Kingdom and any Scandinavian country is hardly ambitious for a country so in need of new business.  But, it is a move in the right direction. 

The president is also proposing the elimination of many tax loopholes while creating (or at least re-crafting) others. Eliminating or phasing out tax loopholes for corporations is good policy, while making new ones is not.  It is probably good politics though.  The president plans to eliminate loopholes for energy companies, while creating new ones for manufacturing firms.  The condition of the 2012 electoral map should make clear why (though with gas much above $4.00, as it likely will, this might backfire).  The electoral battleground is in the industrialized Midwest, and here manufacturing incentives play well with voters.

Sadly, manufacturing incentives don’t play as well with the economy as they do with the electorate.  While there is abundant, high-quality research on the ineffectiveness of incentives, I won’t bore you with its recounting.  Instead look to Michigan.  The stimulus bill shifted tens of billions of federal dollars to battery research and development.  Today, Michigan is the battery capital of the world, unfortunately that claim can best be based on the fact that an abundant share of those batteries are sitting in the recently recalled Chevy Volts.  Michigan’s unemployment rate sits starkly above 10 percent and the state is has set an outmigration record for the Western Hemisphere in modern times. Tax incentives are popular with corporations and those voters who hope against evidence that they work.  They are not good for the rest of us. 

The president hopes to boost tax revenues with this move.  It is likely that will happen, as lower rates and a broader tax base (through fewer incentives) most often boosts tax revenues.  This recurring lesson unfortunately deprives policymakers of the opportunity to pick winners and losers among their corporate friends, and hence receive outsized political contributions.  

Still, I expect the largest outcry from this policy will come from the president’s erstwhile friends on the left.  Cutting corporate taxes might help keep American jobs, reduce the deficit and better level the playing field for American businesses.  This will please many of us who wish prosperity to again embrace the republic. However, it won’t do much to punish those greedy and malevolent corporations, which is an overriding, if illogical, goal of too many Americans.