The Treasury Department will unveil President Barack Obama's corporate tax reform plan Wednesday -- a framework that would reduce the overall rate paid by corporations, a senior administration official told CNN. The president's tax plan is intended to "enhance American competitiveness by simplifying the tax code and eliminating dozens of tax loopholes and subsidies, incentivizing job creation and investment here at home and lowering the business rate while broadening the tax base," the official said. The proposal calls for lowering the overall corporate tax rate from 35% to 28%, and the effective rate for manufacturing to 25%. The official, who laid out the plan's broad framework for CNN, said the proposal is essential to fixing a system that is "uncompetitive, unfair, and inefficient." The official told CNN the lower rate would be largely funded by eliminating dozens of tax loopholes and subsidies, and broadening the business tax base.
The White House gets points for admitting that our system is "uncompetitive, unfair, and inefficient." That is surely true. As it stands today, the US corporate tax rate is tied for the highest in the industrialized world. Applause is also in order for at least paying lip service to lowering corporate rates while eliminating some loopholes. This general approach to tax reform has been advocated by everyone from Grover Norquist, to Paul Ryan, to the president's (mostly ignored) fiscal commission. However, there are major flaws with Obama's plan, the biggest of which is that it's a giant political head fake.
President Obama has had more than three years to do offer leadership to rectify our uncompetitive and inefficient tax system. For two of those years, he had a fully compliant Congress at his disposal. Yet when his debt commission recommended significant tax reforms, he moved on none of them. Now, an election looms, and Republicans are poised to make tax reform and economic growth central issues in the campaign. By rolling out this tardy tax plan, Obama is inoculating himself against political charges of inaction. "See, I've proposed something that sounds reasonable to most people," he'll say, inevitably invoking one of this favored tropes by noting that a majority of economists from "across the political spectrum" endorse his ideas. But does he have any intention whatsoever on acting on this plan? I doubt it. Pardon my skepticism, but I tend to believe there's a reason the president couldn't be bothered to even show up for the announcement of his own plan, a task he pawned off onto Tim Geithner. Barack Obama is not a modest man. If his administration were releasing a major policy initiative to which he was deeply committed, I tend to think he would insist on being its public face and top salesman. Remember, he has a gift. By merely issuing a perfunctory written statement, Obama signaled his ambivalence to the rapacious tax-hike-and-spenders within his base.
Beyond my contention that the White House has no genuine intention to shepherd this legislation through (this is, I admit, an unprovable questioning of motives), there are also policy shortcomings with this plan. First, despite all the talk about cutting rates, Obama's plan actually raises the tax burden on US corporations. A CNBC report today indicated that the administration hopes to wring an extra quarter-trillion out of corporations with this move. Second, it focuses exclusively on corporate taxes, which side-steps the need for comprehensive reform of the entire tax code -- a necessity that Obama's sundry commissions have emphasized. And third, it explicitly ignores a recommendation of Obama's jobs council, which suggested exempting foreign income from taxation if repatriated to the US. Obama not only dismissed this idea, he did the opposite, introducing a new minimum US tax on international corporations' foreign earnings. AEI's Jim Pethokoukis has a lot of the heavy lifting in examining this proposal, and he comes away decidedly underwhelmed:
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 by $250 billion over a decade (and de facto on workers, too) without lowering rates to an internationally competitive level. This is a terrible, terrible plan.
Real pro-growth corporate tax policy would eliminate tax breaks, dramatically lower tax rates, and only tax profits earned at home. The Obama plan would actually make the corporate tax code and the U.S. economy less competitive and less productive. But the proposal does neatly fit into the president’s Occupy-inspired campaign theme that wealthy Americans and greedy corporations are to blame for the Great Recession and rising income inequality. Besides, how can Democrats ever raise taxes on the middle-class to pay for all their spending ideas without first socking it to the 1 percent and to business?
Along the lines of my second criticism above, Pethokoukis notes that Obama's proposed corporate tax rate cut, coupled with his individual tax rate hikes on the rich would encourage increased tax avoidance:
Obama and Geithner would take the top individual tax rate to 40 percent, leaving a 12 percentage-point gap with the corporate tax rate. This creates a huge incentive for tax sheltering.
Don't believe Jim? Britain's leaders are re-discovering economic reality the hard way:
The Treasury received £10.35 billion in income tax payments from those paying by self-assessment last month, a drop of £509 million compared with January 2011. Most other taxes produced higher revenues over the same period. Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. The figures will add to pressure on the Coalition to drop the levy amid fears it is forcing entrepreneurs to relocate abroad. The self-assessment returns from January, when most income tax is paid by the better-off, have been eagerly awaited by the Treasury and government ministers as they provide the first evidence of the success, or failure, of the 50p rate. It is the first year following the introduction of the 50p rate which had been expected to boost tax revenues from self-assessment by more than £1billion.
Knock me over with a feather: Jacking up income tax rates on "the rich" doesn't actually produce the predicted revenue, and motivates successful people and businesses to relocate? Who could have seen that coming? Meanwhile, on the other side of the aisle, Gov. Mitt Romney has introduced his own tax reform package, which supplements the piecemeal approach many conservatives have decried as far too timid. Pethokoukis, like Larry Kudlow and others, is enamored with Romney's revamped vision:
Romney 2.0 goes the full Reagan. The plan’s centerpiece: An across-the-board, tax-rate cut of 20 percent, returning the top rate to 28 percent, where it was when Reagan left office in January 1989. In addition, the tax rate for people in the lowest income bracket would drop to 8 percent from 10 percent, and to 20 percent from 25 percent for those Americans in the middle, according to the Wall Street Journal. And how would Romney pay for the tax cuts? Well, the revenue would come through a combination of faster economic growth and new limits placed on deductions, exemptions, and credits — particularly on higher-income Americans. Indeed, if you are going to cut the corporate rate to 25 percent, as Romney proposes, then you really need to get top marginal rates in that ballpark, too, to avoid avoid creating distortions leading to tax shelter mania. (The Obama White House ignores this in its new corporate tax plan. Team Obama would lower the corporate rate to 28 percent, leaving a huge gap with the 40 percent top marginal individual income tax rate it also wants.)
I'd add that Romney would also balance the ledger by cutting government spending and reforming our currently-doomed entitlement programs. Pethokoukis offers lavish praise for Newt Gingrich and Rick Santorum's tax reform packages, too, but asserts that Romney's has the best chance of actually passing:
Is the Romney plan as bold and aggressive as those proposed by Rick Santorum (two individual rates, 28 percent and 10 percent, along with a 17.5 percent corporate rate) and Newt Gingrich (a 15 percent flat income tax, 12.5 percent corporate tax, zero investment taxes)? Certainly not, though it remains to be seen how Romney would alter the vast tangle of tax preferences cluttering up the code. But Romney’s plan would have a much better chance of actually being enacted by the next Congress if he becomes the 45th president of the United States. So Romney should get points for realism.
Expect Romney to refer to this new policy proposal early and often at tonight's debate. If the early reviews are any indication, conservatives will receive his plan pretty well. Too bad he's already employing Occupy-style rhetoric to help sell it:
These panders are unnecessary and won't impress many of the votes he's trying to attract in Republican primaries. The policy is solid. Will the candidate learn how to talk about it in a way that doesn't alienate conservatives by bowing to Lefty framing?