Economics, Taxes and Spending

Why Obama’s corporate tax plan is a total bust

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 by $250 billion over a decade (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 percent from 35 percent, 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 percent, far above the OECD combined average of 25 percent. 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 percent. 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 percent, 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 percent 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 percent increase in corporate tax rates is associated with nearly a 1 percent 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 maximize revenue would be to flat out cut the top corporate rate 8.6 percentage points to 26.4 percent. 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 percent, 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 percent 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.

24 thoughts on “Why Obama’s corporate tax plan is a total bust

  1. While I agree with your overall criticism of Obama’s plan, I disagree with some of the particulars of your criticism:

    It is a fiction that US corporations would be investing more in the US but for their being taxed on repatriated earnings. These companies are not lacking for available cash (or credit) to invest domestically, rather it is the lack of profitable investment opportunities that is responsible for the low level of domestic investment. I challenge you to name a single multi-national with overseas cash holdings that is passing up investment opportunities because of a lack of cash. (note: I would exempt all repatriated earnings from tax provided the companies paid a dividend equal to the amount brought back in – a win/win, as it would provide both a boost to domestic spending and tax revenue on the dividends).

    I understand your theory that corporate taxes hurt workers, but that reflects the thinking of people who (I believe) have little if any experience in the real world. Taxes are a cost of running a profitable business along with other categories of expenses such as wages, equipment, raw materials and so on. The price of each (non-tax) expense is determined by the supply and demand curve for that good or service. The equilibrium for wages doesn’t shift upward if a company is able to lower its cost for another category of expense. Nor will a company voluntarily spend more than the market price for an expense because it is able to realize a savings in another category. Thus, were a company to lower its tax rate, it would stick the cash in the bank and wouldn’t raise compensation.

    Finally, the Laffer Curve doesn’t apply to corporate taxes to the same extent as it does individuals. Per my point above, taxes are but one cost component that companies factor into their decision as to what opportunities they pursue and what level of activity they operate at. While lowering the tax rate a few percentage points would represent a big percentage drop in the tax rate but a rather small drop in overall cost structure of a business (except for companies with extremely high profit margins). Thus, lowering the tax rate a few percentage points would shift very few opportunities from the ‘not worth it’ to the ‘worth it’ rating. Thus, at best there might be a marginal (and extremely marginal) boost in production.

  2. While I agree with your overall criticism of Obama’s plan, I disagree with some of the particulars of your criticism:

    It is a fiction that US corporations would be investing more in the US but for their being taxed on repatriated earnings. These companies are not lacking for available cash (or credit) to invest domestically, rather it is the lack of profitable investment opportunities that is responsible for the low level of domestic investment. I challenge you to name a single multi-national with overseas cash holdings that is passing up investment opportunities because of a lack of cash. (note: I would exempt all repatriated earnings from tax provided the companies paid a dividend equal to the amount brought back in – a win/win, as it would provide both a boost to domestic spending and tax revenue on the dividends).

    I understand your theory that corporate taxes hurt workers, but that reflects the thinking of people who (I believe) have little if any experience in the real world. Taxes are a cost of running a profitable business along with other categories of expenses such as wages, equipment, raw materials and so on. The price of each (non-tax) expense is determined by the supply and demand curve for that good or service. The equilibrium for wages doesn’t shift upward if a company is able to lower its cost for another category of expense. Nor will a company voluntarily spend more than the market price for an expense because it is able to realize a savings in another category. Thus, were a company to lower its tax rate, it would stick the cash in the bank and wouldn’t raise compensation.

    Finally, the Laffer Curve doesn’t apply to corporate taxes to the same extent as it does individuals. Per my point above, taxes are but one cost component that companies factor into their decision as to what opportunities they pursue and what level of activity they operate at. While lowering the tax rate a few percentage points would represent a big percentage drop in the tax rate but a rather small drop in overall cost structure of a business (except for companies with extremely high profit margins). Thus, lowering the tax rate a few percentage points would shift very few opportunities from the ‘not worth it’ to the ‘worth it’ rating. Thus, at best there might be a marginal (and extremely marginal) boost in production.

    • “Thus, were a company to lower its tax rate, it would stick the cash in the bank and wouldn’t raise compensation.”

      In the bank? Really? Not dividend it out or reinvest it in operations? Tens or hundreds of billions of dollars being put back into the economy in the form of productive capital would do what, I wonder? Employ more people, thus increasing wages?

      • I think the best answer is to point out that companies are sitting on record amounts of cash right now (I remember reading the amount isn’t in the tens or even hundreds of billions but rather trillions of dollars sitting on the sidelines).

        They’re doing so in large part because they don’t see the worthwhile opportunities to invest those funds (and due to fear of another crisis in which a huge pot of cash would provide a cushion).

        • I think the best response is to mention that most of those funds are being held by a small number of companies–many with Democratic leanings (think GE/GM/Apple). Your assertions, while valid for SOME companies and corporations (again, think the same), are categorically false when compared to the larger base of “American Companies and Corporations” most of which employ less than 1,000s of people. I recognize your broad generalization and critical thinking skills are at odds; then again, by calling it fiction, I’d wager you’re the “99%” who is actually in the top “20%” worldwide but apparently lacks the latter skill set…

    • there should be no corporate income taxes. shareholders should be taxed on their share of income. as a group, they should determine when to realize their income in the form of cash distributions ord capital gains. for that matter, there should be no distinction in the tax rates for short-term gains, long-term gains, or dividends.

    • Steve, in your second paragraph is reasonable until the final conclusion that companies would simply stick the money in the bank. This presumes that companies would not see their improved profit and cash position as an opportunity to invest in new markets or go after market share of a competitor. This is a more likely outcome than just stuffing their bank accounts, my forty years of experience in businesses around the world tells me return rates of companies would receive a temporary boost but over time competitive market pressures would return industries to their historical return rates. The real winners in reducing or eliminating corporate taxes would ultimately be consumers.

      • George:

        There are two (major) components in a company deciding to pursue opportunities for growth: first, can they make money, will the opportunity provide a positive return on investment? second, do they have the resources with which to pursue that opportunity?

        Since, with the exception of poorly capitalized/marginally profitable businesses, there isn’t a real lack of cash/credit with which to pursue whatever opportunities a business wanted to pursue, the logical conclusion for the lack of investment is that they don’t think they can make money. It doesn’t matter how much money a company has, they’re not going to spend it on unprofitable endeavors.

  3. The Prez and his T-Man Geithner may APPEAR to not understand the consequences of manipulating tax codes as they’ve proposed, but they sure know how take advantage of things and defuse the economy as an issue. Keep in mind how cynically they’ve been playing to their core base recently (there is an election coming up soon, right?), and how thoroughly they seem to discount the ability of many voters to pay attention to the details of an issue, until, say October 2012, when things may generally look even better!

    President Obama is acting more and more like President Carter, looking for a way to save his re-election prospects by timing moves that sound good as the economy heats up in ways that are easily appreciated (DOW index at 13000!, auto sales booming!) Recall: Jimmy C and his Cap Gains reductions. We need to underline the essence of any move like this so that one message is clear – what’s needed is a simple plan that trusts the free-market, and not more manipulation.

  4. I cannot even believe hacks like you even bring up the laffer curve, that is a laugher. I think you need to work more in reality try it sometime.

    • The Laffer Curve is only demonized by ignorant people. It is merely a device to explain and discuss the relationship between tax rates and tax collections. At zero percent tax collection is zero and at 100% tax collection is approaches zero (why work? – except if government then gives you everything). At points between it is demonstrably above zero.

      One could say that the appropriate tax rate is that which maximizes tax collections, but the role of government should not be to extract the maximum from it’s citizens.

      • no, the “laugher” curve has been fully discredited. only right wing hacks like Petrokookus bring it up. and dipshit R footsoldiers buy the story.

        Paulson: “I don’t believe that tax cuts pay for themselves.” During his June 2006 confirmation hearing, then-Treasury Secretary Hank Paulson said, “As a general rule, I don’t believe that tax cuts pay for themselves.” The financial information website MarketWatch reported this statement as “echoing the opinion of most economists.”

        Nussle: Tax cuts do not “totally pay for themselves.” According to a November 15, 2007, Washington Post editorial, Jim Nussle, then the director of the Office of Management and Budget, told reporters, “Some say that [the tax cut] was a total loss. Some say they totally pay for themselves. It’s neither extreme.”

        Viard: “No dispute” revenues lower than they would have been without Bush tax cuts. In an October 17, 2006, article, the Post quoted Alan D. Viard, a former Council of Economic Advisers senior economist under Bush, saying that “[f]ederal revenue is lower today than it would have been without the [Bush] tax cuts. There’s really no dispute among economists about that.”

        Lazear: “[W]e do not think tax cuts pay for themselves.” During his testimony to the Senate Budget Committee in 2006, Edward Lazear, then-chairman of Bush’s Council of Economic Advisers, stated: “Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data presented above do not support this claim.”

        Samwick: “You know that tax cuts have not fueled record revenues.” In a January 2007 New Year’s Plea,” to “anyone in the [Bush] Administration who may read this blog,” Andrew Samwick, an economics professor at Dartmouth College and former chief economist to the Council of Economic Advisers during the Bush administration, wrote:

  5. No where is there a mention of the 12% effective tax rates currently being paid by American corporations? No mention that the total corporate tax take is at decades lows?

    If workers actually bore the burden of corporate taxes, the unemployment rate would be at its lowest level ever.

    Just piss poor analysis.

  6. Corporate taxation is double taxation. It should be abolished. Economists on right and left recognize this. See Milton Friedman, Michael Boskin, Robert Reich, and Lester Thurow. Any talk of “cutting” corporate tax rate is pure nonsense, because any rate > 0% is still double taxation.

  7. Folks, put all this economics theory aside and stop trying to outsmart the next guy. He’s the simple truth. I’m a successful business man. I employ 87 persons. Go ahead and lower my tax rate and offset it with decreased tax deductions. Fine. If the net is an increase in my costs, I have two and only two responses to maintain status quo. I first look for ways to reduce costs, including improvements in efficiency of operations, wage freezes, and wage cuts. If that doesn’t keep my head above water, I have no other option but to raise my prices. If I can’t compete, I go out of business. The Feds need to stop trying to help me and just lower my tax rate. Do nothing else. PLEASE!

    • Brian, it really is that simple. I see this everyday in my business as a corporate real estate consultant. We serve our clients needs based on how the location of their facilities affects their cost of doing business. While their cost for raw materials are generally constant from one potential location to another, there are many other costs that can be lowered or raised by moving from one city to another, one state to another, or one country to another. The main location variable costs are labor, utilities, land, regulations and taxation. Of those five, taxation has an impact on the three of the four others. While the differential may be only a few percent, it goes straight to the bottom line and can easily represent the difference between being competitive or being able to develop new products.

      One of my major multi-nationals chose to re-charter its corporation in Bermuda solely to avoid being double taxed on its offshore activities. The benefit to them was in the $100mm/year range.

  8. Anyone with a 401K plan better look out. Between the corporate tax and the new dividend tax, your 401K is going to dwindle. This is what Obama wants. He doesn’t think its right that some people have one and others do not. He wants to be sure no one does. And those that do, it will be worth nothing.

  9. You state: “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. ” What evidence do you have that Obama learned anything about the free market – theoretical or otherwise – in college? It is perfectly possible get through 19-20 years of education in this country, and to do so with distinction, without ever having to encounter any study whatsoever of the engine that drives the nation’s prosperity. That’s the sad truth and Obama is exhibit A. For other high profile exhibits look at Democratic Congressional leadership and the ranks of elite journalism.

  10. Steve definitely shows a better understanding of the economy and business than the author and probably more than AEI’s “economists.” Every one of these analyses is meaningless since it looks at statutory top rates and not effective rates, which do not vary nearly as much across countries as the statutory rate. The Laffer curve is an accurate representation of a concept but actual numbers for it exist only at the points BOB mentions, 0% and 100% tax rates. Since no country will have either, it is completely meaningless.

    If AEI wants the US to be more like Chile or Slovakia, they can change their name and move there. I like the U.S., myself.

  11. I see that some individuals are having fun playing with the numbers, and theory, while throwing in a smattering of facts. The only thing I didn’t see mentioned, but may be there somewhere is a tax break for business expansion by. Creating full time jobs with benefits that last over a year, in the USA only.

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