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 per cent from 35 per cent, 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 per cent, far above the OECD combined average of 25 per cent. 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 per cent. So instead of having the second highest corporate tax rate in the world, the United States 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.
3. To pay for the lower tax rate, Obama would eliminate “dozens of tax loopholes and subsidies,” according to Politico. But some of the money would be used to “lower the effective rate on manufacturing to no more than 25 per cent, while encouraging greater research and development and the production of clean energy,” according to the Times.
First, the effective manufacturing tax rate would be higher than 25 per cent once you add back state taxes. Second, the White House is sticking to its clean energy agenda even as other advanced economies like Germany and Spain are abandoning such wasteful subsidies. Again, this is ideology trumping economic reality.
4. Obama and Geithner apparently still don’t understand how harmful corporate taxes are. Here’s the OECD: “Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes.”
5. Obama and Geithner apparently still don’t understand who bears the burden of corporate taxes. It’s workers.AEI economists Kevin Hassett and Aparna Mathur have found that “corporate tax rates affect wage levels across countries. Higher corporate taxes lead to lower wages. A 1 per cent increase in corporate tax rates is associated with nearly a 1 per cent drop in wage rates.”
6. Obama and Geithner apparently don’t understand that “corporate income taxes have a highly significant and negative effect on long-term growth,” according to the Tax Foundation:
7. Obama and Geithner apparently don’t understand that U.S. corporate tax rates are so off the map that the best way to maximise revenue would be to flat out cut the top corporate rate 8.6 percentage points to 26.4 per cent. You could then eliminate corporate welfare and take the rate even lower.
8. Obama and Geithner would take the top individual tax rate to 40 per cent, leaving a 12 percentage-point gap with the corporate tax rate. This creates a huge incentive for tax sheltering.
Bottom line: 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 per cent and to business?
Obama had no experience in the private sector before becoming president. The free market is a sort of theoretical construct he learned about in college. But Geithner should know better. He’s had lots of contact with all sorts of executives, both at Treasury and when he ran the New York Federal Reserve Bank. If he has any doubts about this plan, he should resign. And if he doesn’t, he never should have gotten the job in the first place.
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