Obama moves on corporate-tax reform

Corporate tax reform has long been an opportunity for a win-win bipartisan effort in Washington. Everyone agrees that the corporate code needs significant changes, if not a complete overhaul; it’s too complicated, too costly, and rewards the larger companies that can afford to analyze it for every possible benefit.  Both parties have made corporate tax reform part of their plartforms, Democrats arguing that we need to close loopholes, Republicans that we need simplification and lower rates.

The White House decided to go first on corporate tax reform:

The Obama administration Wednesday will unveil a framework for reforming the corporate tax code that would lower the top rate from 35 percent to 28 percent but generate more total revenue by eliminating “dozens of tax loopholes and subsidies” and creating a minimum rate on foreign earnings.

Treasury Secretary Timothy Geithner will formally unveil the tax reform blueprint at 11:30 a.m.

The “global minimum tax” makes an appearance, along with a laughable pledge to pay for the rate reduction by — wait for it — “greater fiscal responsibility”:

The tax reform framework “eliminates dozens of different tax expenditures and fundamentally reforms the business tax base to reduce distortions that hurt productivity and growth. … It reinvests these savings to lower the corporate tax rate to 28 percent, putting the United States in line with major competitor countries and encouraging greater investment,” according to an administration official.

The official added that the framework “would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.”

The framework would establish “a new minimum tax on foreign earnings, to encourage domestic investment.” The proposal will be “fully paid for … to greater fiscal responsibility than our current business tax system by either eliminating or making permanent and fully paying for temporary tax provisions now in the tax code.”

“Greater fiscal responsibility”? Isn’t this the same White House that produced four trillion-dollar-plus budget deficits?  Yeah, that will work out well.

James Pethokoukis takes a long look at the proposal, and declares that Treasury Secretary Tim Geithner should resign for putting his name to it:

The current U.S. economic recovery is arguably the worst in modern American history. Incomes are flat, housing is moribund and the past three years have seen the longest stretch of high unemployment in this country since the Great Depression. Yet President Barack Obama—with the backing of Treasury Secretary Timothy Geithner—has the temerity to propose a corporate tax reform plan that would actually raise the tax burden on American business (and de facto on workers, too) without lowering rates to an internationally competitive level. This is a terrible, terrible plan:

1. The Obama-Geithner plan would lower the statutory corporate tax rate to 28 percent from 35 percent, currently the second-highest among advanced economies. But that would still leave the combined U.S. corporate tax rate — state and federal — at 32.2 percent, far above the OECD combined average of 25 percent.  The U.S. combined rate would be a bit below slow-growing Japan and France but above the U.K. and Germany. That’s not nearly good enough. Canada just lowered its corporate tax rate, for instance, to 15 percent. So instead of having the second highest corporate tax rate in the world, the U.S. would probably be fourth behind Japan, France and Belgium.

2. The Obama-Geithner plan would establish, according to the New York Times, a minimum tax on multinational corporations’ foreign earnings to discourage “accounting games to shift profits abroad” or actual relocation of production overseas.

So instead of a carrot, Corporate America gets the stick. Instead of lowering the U.S. rate to a competitive level, Obama would raise the penalty on keeping profits overseas. Indeed, the United States is a huge outlier in that it taxes the foreign profits of multinational companies. Here is Obama’s own Jobs Council:

While most other developed nations have adopted territorial systems that exempt most or all foreign income from taxes when they are repatriated, the U.S. subjects all worldwide earnings to the corporate income tax when they are brought home to the U.S. This approach actually encourages U.S. companies to keep their earnings abroad rather than investing them here at home. Adopting a territorial tax system would bring us in line with our trading partners and would eliminate the so-called “lock-out” effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of American companies in the U.S.

Obama’s debt commission made a similar recommendation.

James has plenty more to say, especially on the lack of understanding on the part of Obama and his team about basic economics.  Who pays corporate taxes? Consumers and employees do.

However, from a political perspective, this may be even worse than its economics.  For the second straight year, Obama has launched a major proposal while deliberately disregarding his own advisory panel’s recommendations.  That turned into political disaster last year, when Obama’s budget ignored his own appointed deficit panel.  His budget got voted down unanimously in a Senate controlled by his own party, making him look extreme and out of touch on budgetary issues.

Now his new corporate tax proposal ignores the recommendations from the panel Obama created to much fanfare last year as part of his focus on job creation and economic growth.  The obvious conclusion is that Obama has prioritized punitive tax changes on American business in order to fund his spending expansion over economic growth.  Republicans need to emphasize that Obama’s job council turned out to be nothing more than a smoke screen, just the same as Simpson-Bowles, and that this corporate tax “reform” is anything but.

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