Tuesday

September 23rd, 2014

Insight

Obama's Segue From Constructive Tax Proposals to Low-Grade Demagoguery

Michael Barone

By Michael Barone

Published August 29, 2014

"The tax system should be simplified and work for all Americans with lower individual and corporate tax rates and fewer brackets."

That's from the Obama administration's 2009 proposals for tax reform, straight from whitehouse.gov.

"Because our corporate tax system is so riddled with special interest loopholes," the document goes on, "our system has one of the highest statutory rates among developed countries to generate about the same amount of corporate tax revenue as our developed country partners as a share of our economy."

That is still accurate except that, now that Japan has lowered its corporate tax rate, the U.S. is not "among the highest" but is the highest among developed countries.

The first step in establishing good public policy is identifying problems with and weaknesses in current policy. On the corporate tax, President Obama and his administration started off on the right foot.

Unfortunately, they haven't moved any further.

Not while Democrats held supermajorities in both houses of Congress in 2009 and 2010. Not in the so-called grand bargain negotiations with House Speaker John Boehner in 2011.

And not in Obama's second term. Acting apparently on the belief that he voiced on the campaign trail, that the Republicans' "fever" would break once he was re-elected — evidently he regards opposition to his policies as sickness — Obama upped the ante.

His previous proposals for corporate tax reform were revenue-neutral. Rates would be cut and preferences eliminated so as to maintain the same revenue stream.

But his 2013 proposal was different. Corporate tax reform would have to increase revenue. More money to spend on infrastructure or food stamps or crony-connected solar panel subsidies.

Coupled with that was the appointment of Jack Lew as secretary of the Treasury. Participants in the 2011 grand bargain discussions reported that Lew was the most partisan and obdurate of administration negotiators. His appointment was a signal the president wanted no deal.

Even so, Senate Finance Committee Chairman Max Baucus, a Democrat, and House Ways and Means Chairman Dave Camp, a Republican, engaged in extensive negotiations with a view to overall tax reform.

They recognized that the high corporate tax rate handicapped U.S.-based firms. They understood as well that the U.S.'s near-unique worldwide taxation policy hurt them further.

Other countries tax only profits made domestically. The U.S. taxes profits made abroad minus any foreign corporate tax paid.

As a result, U.S. corporations leave trillions in profits overseas because they get taxed if they bring it back home to do nefarious things such as create new jobs.

All this is, or should be, in the news this week because of the proposed acquisition of U.S.-based Burger King by the Canada-based Tim Hortons donut chain. The new company would pay U.S. rates on profits made here, but less on profits made elsewhere.

This is what the administration calls an "inversion" and which its cheerleaders denounce as "unpatriotic." Several U.S.-based pharmaceutical and medical device firms have made similar transactions with a view to reducing total tax liability.

But, as Judge Learned Hand wrote long ago, "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes."

Those who consider their taxes too low may donate money to the Treasury. Some people actually do so.

Some liberals lament that many countries have been lowering their corporate rate to attract more businesses. Ireland's low 12.5 percent corporate tax, plus its high-literacy work force and rule-of-law courts, have spurred much investment there.

These liberals want to resist this "race to the bottom." But as economists of just about all stripes agree, the corporate tax is not really paid by Scrooge McDuck-like figures wallowing in their money bins. The costs are passed along to consumers and employees.

So there's a strong argument for eliminating the corporate income tax altogether. Absent that, there's an overwhelmingly strong argument for cutting the rates and reducing its extra-territorial reach.

At the beginning of his presidency, when he was hailed as a politician uniquely amenable to compromise and reconciliation, Obama recognized the strength of this case.

But it turns out that he lacks either the inclination or the skills to negotiate, or both. So we get denunciations of "unpatriotic" corporations rather than a policy that solves a readily solvable problem.

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JWR contributor Michael Barone is senior political analyst for The Washington Examiner.

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