The Problem With Obama's Corporate Tax Cut Is It's Not A Tax Cut

Barack Obama Tennessee speech

There’s something really weird about the economic message President Obama put forward today.

He talked about how we’ve already had a lot of deficit reduction and we need to shift our focus to creating jobs and strengthening the middle class.

But he also can’t stop talking about how great his deficit reduction record has been, and he’s still imposing a major restriction on his job creation proposals: They can’t grow the deficit.

So he ended up proposing what amounts to a small corporate tax increase to pay for a small infrastructure program. This has been missed in much of the news coverage, particularly on television: Obama has called for a corporate tax rate cut, but he says that should come with enough base broadening to fully offset any revenue loss in the long term, and more than offset it in the short term. Liberals are, for some reason, expressing surprise that conservatives aren’t interested in this idea.

If Obama abandoned his deficit-neutrality rule, his proposal could be better on both policy and politics. He should call for a real corporate tax cut—one that loses revenue by cutting the tax rate—and a larger infrastructure program, all financed with debt.

A debt-financed plan would be better for the economy. It’s cheaper than ever for the government to borrow. Why not finance infrastructure investments with cheap debt instead of new tax revenue? Why try to collect more taxes from corporations at a time when we’re trying to encourage business investment?

Just as importantly, a deficit-increasing proposal would stand a better chance of enactment. Sure, some Republicans would take the opportunity to hit the president as an irresponsible spender. And a debt-financed infrastructure plan, as a standalone proposal, would stand little chance of passage.

But Republicans would find it very tempting to support a deal that includes a real corporate tax cut, rather than a tax rate cut that is more than offset by base-expanding measures they oppose. Tempting enough, even, to support an infrastructure plan they would otherwise not be interested in.

Business groups would put a lot of pressure on Republicans to support such a proposal. It’s hard to imagine the Wall Street Journal editorial board pushing back against a plan to cut taxes on corporations.

And liberals shouldn’t be as eager for corporate tax revenue as they are. I wrote back in May about the Whack-a-Mole like task of making the corporate tax “fair.” It’s complicated, but the thrust of the piece is that the corporate tax creates two different competitiveness gaps: between domestic firms and multinationals, and between U.S.-based multinationals and foreign ones. The more you do to reduce multinationals’ advantage relative to domestic firms (and raise revenue), as Democrats want, the more you put U.S. multinationals at a disadvantage to their foreign competitors.

The better solution is to throw up our hands and admit the corporate tax will never work that well. Instead, we should rely less on taxing firms and more on taxing the people who own firms. A cut in the corporate tax rate, perhaps to 28% or 25%, only partly offset by base broadening, would be a step in that direction.

Of course, there’s a problem with the trade I’ve laid out: Republicans would agree to cut corporate taxes, but they obviously won’t agree to a significant increase in individual income taxes on the wealthy to offset it. But on this score, Democrats should be patient.

They’ll eventually take back the House, at which time higher taxes on the wealthy will still be popular, and they will be able to raise them. And for now, they can be glad that they’ve already gotten a big increase in top individual tax rates, through Obamacare and the January budget deal. In 2013, the top capital gains tax rate is 23.8%, up from 15% in the Bush administration; the top rate on ordinary income is up to 43.4% from 37.9%.

In the meantime, the left would get two things from a corporate tax cut deal: An infrastructure spending package, and a defeat of the bipartisan pro-austerity norm. It’s the only way anything resembling a fiscal stimulus deal will get through this Congress. Democrats should just make sure the infrastructure package is big enough, relative to the corporate tax cut, to be appealing.

It’s easy for Republicans to reject a higher-taxes-and-higher-spending deal. A deal with a corporate tax cut would pose much better questions. For Republicans: do we care more about cutting the corporate tax or saying “no” to President Obama? For Democrats: do we care more about fiscal stimulus or collecting more near-term taxes on capital?

Republicans should pick the former and so should Democrats. But so long as the President insists on locking in deficit reduction, we’ll never find out whether they would.

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