This afternoon, President Barack Obama gave the second of seven (seven!) planned economic policy speeches this summer.
Today’s focus was a “grand bargain for middle-class jobs.” But it’s not clear who he’s bargaining with.
The president proposed to reform the corporate tax and use short-term revenues from reform to pay for one-time spending, likely on infrastructure, community colleges, and support for manufacturing.
Republicans have been “crapping all over” this proposal, as the Huffington Post’s Jennifer Bendery put it on a conference call with the White House this morning. A spokesman for House Speaker John Boehner said the proposal leaves “small businesses and American families behind.”
It’s easy to understand why Republicans hate the proposal. Obama is proposing a short-term business tax increase, which he would use to finance a new round of temporary government spending. Does that sound like a grand bargain with conservatives?
Yes, Obama is proposing a big cut in the corporate income tax rate, from 35% to 28%. But the White House is also saying corporate tax reform should be revenue-neutral in the long term and actually raise revenue in its first few years, which would mean a big expansion of the corporate tax base.
While most everyone nominally favours “lower rates, broader base,” the particular way you broaden the base is a major point of contention. And the President’s signals, though vague, do not line up with conservative priorities on the corporate tax.
Some base-broadening ideas, like limiting the deduction of interest expenses and changing inventory accounting rules, can achieve bipartisan support. But it’s probably impossible to develop a corporate tax reform plan that cuts the top rate to 28%, is revenue neutral, and isn’t full of base-broadeners that conservatives hate.
On this morning’s conference call, National Economic Council Director Gene Sperling cited reform of depreciation rules as one potential base-broadener. This would mean slowing the pace at which companies can deduct capital expenses from their taxes. Conservatives generally favour faster expensing, which they believe encourages capital investment.
There is also the issue of changing our current system (which nobody likes) where U.S.-based multinational firms pay tax on their foreign profits, but only when they bring those profits back to this country. But the two sides want to change this system in different ways: Democrats’ priority is to stop multinational companies from shifting their income to shield it from tax; Republicans want to make sure American companies aren’t disadvantaged against foreign competitors that don’t pay U.S. taxes.
Accordingly, the President wants a minimum tax on foreign profits even if they’re not repatriated and, according to the Wall Street Journal, is considering a one-time fee on profits of American corporations being held abroad.
Conservatives want to move the other way, abandoning worldwide taxation for a “territorial” system where both U.S. and foreign companies only pay tax on their activities in the U.S.
Bipartisan corporate tax reform is difficult enough because of these differences. Now, the President is proposing to take any short-run revenue windfall from such a reform and use it to pay for a spending agenda he’s already advanced and gotten no interest in from Republicans. It’s not much of a grand bargain.
As with the president’s last speech, the main purpose seems to be sending a message: Obama is focused on growing the economy and creating jobs, while Republicans just say “no.” And that message might be helpful for strengthening the president’s position in upcoming fights over the debt ceiling and a plan to fund the federal government after Sept. 30. But it won’t actually get corporate tax reform enacted.
There is one silver lining in today’s proposal, though. The idea for a fee on American corporate profits held abroad is actually a Republican idea. Rep. Dave Camp (R-Mich.), who chairs the tax-writing Ways and Means Committee, proposed it in 2011 to help offset revenues that would be lost if the U.S. stopped trying to tax foreign profits of U.S. companies in the future.
The problem is that Obama is proposing to spend the fee on infrastructure, and in the past he’s said he’s opposed to a “territorial” system of the sort Camp wants. But on today’s call, Sperling opened the door a crack to a compromise with Camp.
Sperling noted that the U.S. currently has a “hybrid” tax system—nominally worldwide, but in fact creating many ways that U.S. companies can shield foreign income from tax. And he said that our system ought to be a hybrid, but one that produces better incentives than today’s. Similarly, though Camp calls himself an advocate of territorial taxation, his past proposals have included many provisions that would tax “foreign” income of U.S. firms if they appear to be hiding domestic income abroad.
In other words, there might be room for compromise on a hybrid system of taxation that would be acceptable to both Obama and Camp. But there are still big hurdles: a deal that is amenable to Camp probably couldn’t achieve a 28% rate and be revenue neutral, and adding an infrastructure package to the bill would decrease Camp’s ability to shepherd it through the House.
Camp’s office didn’t immediately respond to a request for comment about Obama’s proposal.
So, the framework the President is advancing today is mostly about posturing. But one aspect of it might, eventually, become part of a bipartisan deal on corporate tax reform.
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