President Barack Obama in July proposed a “grand bargain” on taxes with Republicans which he said would spur jobs and income growth, especially for lower- and middle-income Americans.
But responses to the speech, including from groups that have been loyal Obama backers, indicate the grand bargain could be a big bust.
“President Obama’s just announced economic ‘grand bargain’ proposal is a disaster for low-income and middle-class Americans. It’s clear from years of a tax system that’s rigged in favor of corporations that the last thing we need is to allow corporations to pay less,” said Liz Ryan Murphey, president of the left-wing National People’s Action network, in a statement.
‘Highest Rate in World’
From the right side of the political spectrum, Tax Foundation President Scott Hodge said, “The President has often spoken of favor of the need to reduce the U.S. corporate tax rate, and he’s right. We have the highest rate in the world, and that needs to come down in order to make us more competitive around the world. But improving the corporate tax code with one hand while placing extra burdens on U.S. companies with the other is not going to lead to the increase in jobs and economic growth we need.”
From Chris Edwards, director of tax policy studies at the libertarian-leaning Cato Institute, there was this: “The Obama administration proposal is a joke—it seems specifically designed not to generate an agreement with the Republicans. Any revenues from broadening the business tax base should be used for reducing marginal tax rates, not for higher spending.”
Obama declared his support for cutting the federal corporate tax rate from 35 percent to 28 percent and giving manufacturers a special tax rate of 25 percent. But he also called for a minimum tax on foreign business earnings and for measures that make it more difficult for businesses to write off investments in plants and equipment. The tax changes would net out to an overall tax increase, which Obama said the government should spend on “infrastructure” such as roads and bridges, and on community colleges, among other things.
“If we don’t make these investments and reforms, we might as well throw up the white flag while the rest of the world forges ahead in a global economy,” Obama said in announcing the plan. “And that does nothing to help the middle class.”
Senate Minority Leader Mitch McConnell (R-KY) expressed his opposition by telling reporters, “The tax hike [the plan] includes is going to dampen any boost businesses might otherwise get to help our economy.”
Territorial vs. Worldwide Taxation
“When it comes to the corporate tax code, there are two major changes that will stimulate investment and lead to greater economic growth,” Hodge said. “One, as the president has acknowledged, is cutting the corporate rate. The other, which he seems dead set against, is to follow the lead of our major trading partners and only tax corporate profits that are earned in this country.”
All other industrialized nations use a “territorial” tax system, in which businesses pay tax where they earn income. For instance, a Germany-based company with income earned in the United States would pay U.S. tax on that money and owe nothing to the German government.
The United States uses a “worldwide” tax system. If a U.S. corporation brings back money earned and taxed in another country, the U.S. government taxes it. Under the Obama proposal, the government apparently would tax all money earned overseas, even if the company does not bring it back to the United States.
‘Could Be Win-Win-Win’
Cato Institute’s Edwards said the Obama administration “fails to see that reducing the corporate tax rate in itself will increase job-creating investments in America. They seem to think that only spending creates jobs and that the effort to reduce the world’s highest corporate tax rate is some sort of giveaway.
“President Obama has an opportunity here given to him on a silver platter, but his ideological blinders seem to prevent him from seeing it and grasping it. He could easily come to a deal with Republicans to drop the corporate rate to 20 or 25 percent, and that would boost the economy while burnishing the president with a new pro-growth, pro-business image. It would be a win-win-win—for Obama, Republicans, and the overall economy.”
‘Siding With Giant Companies’
Ryan Ellis, tax policy director at Americans for Tax Reform, wrote on the atr.org Web site the Obama tax proposal is “actually part of a larger pattern of this president siding with giant, well-funded companies with DC lobbyists instead of Main Street small employers.”
Ellis noted fewer than two million of the nation’s 32 million businesses are corporations; the 28 percent corporate tax rate still would be higher than the rates paid in every major trading partner country except Japan and France; and most American employers pay taxes as individuals and face a top rate of 39.6 percent and a small business Medicare tax of 3.8 percent, resulting in a tax rate that tops 43 percent.
“President Obama thinks it’s a good idea for multinational, giant corporations to pay a 28 percent tax rate while Main Street small employers pay a 44 percent rate. That’s not fair, and it’s not tax reform,” Ellis wrote.