If at first you don't succeed

Obama offers corporate tax cuts in exchange for jobs but probably won’t get either

July 30, 2013
July 30, 2013

The White House’s trial-and-error methodology was on full display today, as president Barack Obama offered the Republican opposition a new combination of old tax and investment policies, searching for the ever elusive “grand bargain.”

The deal is simple: a corporate tax reform that would lower America’s high statutory corporate tax rate from 35% to at least 28%. The lost revenue would be made up by closing loopholes that companies use to pay an average effective tax rate of 12.6%, often, in the case of multinationals, by keeping earnings overseas. In the long run these two effects will balance out, but at the beginning there will be some extra revenue—possibly generated by a one-time fee on all that offshore cash—that will go into paying for infrastructure, new manufacturing centers and training programs for workers.

It’s not a bad idea! A simpler tax code with lower rates would be better for business, and some long-term investment could improve growth.

It will never become a reality.

Now, that sounds like a harsh assessment, but Republicans who are the target of these overtures  panned the idea before the speech. And then there’s…

  1. The first part, revenue-neutral tax reform, is the same offer that Obama made in 2011 in a bid to woo business after his party lost out in the 2010 congressional elections. Businesses were happy to hear about lower rates, but didn’t support the revenue-neutral part—they just wanted to pay less tax overall. Republicans also saw the proposal as not going far enough to lower taxes.
  2. The investment in infrastructure and job training doesn’t interest Republicans.  Democratic Senator Chuck Schumer proposed an even business-friendlier deal in the fall of 2011: A tax-repatriation holiday for companies to bring back money they are keeping overseas, with some of those monies going to an infrastructure bank. There was no joy.
  3. The loopholes to be closed include those that allow multinational companies to keep more money offshore free of tax, a method that firms such as Apple have used to avoid billions of dollars in taxes. That’s the exact opposite to the direction that Republicans—and companies themselves—want to take. They’d like to see the government stop taxing foreign income at all, by switching to a territorial system. Republicans also want to end other loopholes favoring things like renewable energy, which the administration wants to preserve.

Now, in Obama’s defense, the deal does set aside one of the big obstacles for an overhaul of the entire tax code: His desire to reduce the deficit by increasing the total amount of taxes collected, a method Republicans heartily oppose. By focusing on tax reform that is ultimately deficit-neutral—though it collects some new revenue to fund the jobs program as it gradually goes into effect—the administration is hoping to find a policy both sides can agree to. With Republicans too focused on an upcoming showdown over government spending and debt to bother articulating a jobs strategy, and immigration reform the only legislation with any real momentum among both parties, it’s hard to expect much more.

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