In his latest pivot to jobs and the economy, the President spoke earlier today in Tennessee.
Much of his speech was tax-spend-and-regulate boilerplate, but he did repackage some of his ideas into a so-called grand bargain.
He said he’s willing to cut the corporate tax rate in exchange for a bunch of new spending on things such as infrastructure (he didn’t specify whether it would be “shovel ready” this time) and dozens of “innovation institutes” (as if the notoriously sluggish and inefficient federal government can teach the private sector about being entrepreneurial.
In theory, however, such a deal might be worthwhile. It’s not a good idea to add to the burden of federal spending, of course, but if there’s a big enough reduction in the corporate tax rate, it might be worth the cost.
After all, America has the highest corporate tax rate in the developed world and is ranked 94 out of 100 on other measures of business taxation.
But here’s why it’s important to read the fine print. The President wants to give with one hand and take away with the other. Yes, the corporate tax rate would come down, perhaps from 35 percent to 28 percent, but the White House has signaled that businesses would have to accept higher taxes on new investment (because of bad “depreciation” policy) and on international competitiveness (because of misguided “worldwide taxation” policy).
To cite a very simple example, is it a good deal for companies if the corporate tax rate is lowered by 20 percent but then other changes force companies to overstate their income by 25 percent?
In reality, it’s more complex, with some companies probably coming out ahead and others getting hit with a bigger tax bill.
I dig into some of these details in a debate on Larry Kudlow’s CNBC program.
The moral of the story is that it’s not clear whether the tax system would get better or worse under Obama’s proposal.
And if he wants the “grand bargain” to be a net tax increase, then the odds of seeing an improvement drop from slim to none.
So why trade more spending for – at best – sideways movement on tax policy?
P.S. Republicans hopefully learned important lessons about the risks of tax-hike budget deals from the debacles in 1982 and 1990. But if they need a helpful reminder, this chart from the New York Times reveals that the only successful budget agreement was the one in 1997 that cut taxes.
By the way,
[…] Dan Mitchell has a good retort to Obama’s new plan to lower the corporate tax rate. Key takeaway? Read the fine […]
[…] I already explained, immediately following the speech, why his “grand bargain” on corporate taxes was not a good deal because of all the hidden taxes on new investment and international competitiveness. […]
[…] Beware the President’s Bait-and-Switch on Corporate Tax Reform […]
[…] Beware the President’s Bait-and-Switch on Corporate Tax Reform […]
[…] I already explained, immediately following the speech, why his “grand bargain” on corporate taxes was not a good deal because of all the hidden taxes on new investment and international competitiveness. […]
Ned – Obama is a Keynesian. His faith that government spending will help create jobs is absolute.
Plus, if he does spend our money to “fix” the economy, he cannot take credit for the recovery when it finally happens!
[…] « Beware the President’s Bait-and-Switch on Corporate Tax Reform […]
Regarding Obama’s plan:
Only a politician could say this with a straight face: “Let’s cut taxes and raise spending!”
Assuming that government spending stays the same, if you lower the tax revenues from corporations the tax revenues from individuals must be increased. If the attempt to lower tax rates is balanced by lowered deductions, the tax code is headed toward improvement.
Larry suggested that corporations should pay no tax because “people pay taxes”, however, that means that investors must then pay the full tax on profits at individual rates. This is not well thought out, since the most effective tax collection point is the business location [for individual taxes also]. Investors should not pay taxes that have already been taxed at the corporate level.
Regarding Dan’s suggestion [that I agree with] that there should be territorial taxes, there is a problem. Imported components would have a significant advantage over domestic. To compensate for this, you would have to have way to add the tax burden embedded in all domestic production onto the cost of imported goods. One way would be an “import VAT” another way would be to exclude the cost of imported items from the cost of production calculation for tax purposes only.
[…] Beware the President’s Bait-and-Switch on Corporate Tax Reform […]