The Obama White House says it hates tax “loopholes,” and the American people abhor them with good reason. They’re the ultimate in unfairness, allowing those in the know to wiggle their way out of playing by the same rules that apply to the rest of us. That’s why, at first glance, the Obama Administration’s latest “framework” to cut the corporate tax rate while closing corporate tax loopholes might sound like a good twofer.
Before you give the President a gold star for good governance, take a step back, turn up the lights, look around the room, and you’ll see that President Obama has replaced some of those tax loopholes with a giant trap door that’s just the right size for all of his political cronies to slip through.
Here are the details of Obama’s latest crony capitalist ploy. Yesterday, the President proposed reducing the corporate tax rate from 35 percent to 28 percent. That’s certainly a landmark moment – a liberal President calling for a lower corporate tax rate is a Nixon goes to China moment. It’s also long overdue, considering that the U.S. corporate tax rate is the second highest in the world, making it nearly impossible for American companies to compete in the global economy. But here’s where the trouble begins.
Under the President’s “framework,” he singles out specific industries he doesn’t like — oil and gas, insurance, and small aircraft manufacturers, for example — and proposes to close what he asserts are their loopholes, thereby raising their taxes. But with his other hand, he opens a trap door and waves his friends through, cutting their tax rates to 25 percent “and to an even lower rate for income from advanced manufacturing activities.”
The President’s best friends get access to second trap door leading to even lower rates. Who slides on through? Those who qualify for tax incentives designed to “encourage investment in clean energy.” The net effect of all this tax reform subterfuge will be a free pass for the “right” industries, a downfall for the “wrong” ones, and a windfall for lobbyists who can get their clients through the trap doors.
By the way, this new plan to make America’s businesses “more competitive” is slated to raise $250 billion over 10 years. You read that correctly: The President is trying to convince America he is lowering taxes to make America stronger by, well, raising taxes to make America weaker.
Another example of how Obama likes to slam those who offend is a set of disastrous proposals for U.S. multinational corporations — companies that earn income at home and abroad. Today, if a company earns money overseas, it is taxed by the foreign government, taxed again at home, and then run through some convoluted rules to prevent double taxation. Instead of eliminating that domestic double tax (like most countries have), President Obama wants to tax foreign earnings even more heavily. He says he wants to prevent companies from outsourcing around the world.
But instead of convincing those companies to keep their work in the United States, the President will encourage them to close up shop and sell the whole company to the highest foreign bidder. The result? A tax-induced fire sale on U.S. companies sold to foreign companies so that none of their profits will be subject to taxation, and U.S. tax revenues and economic fortunes will plummet.
Next step? American workers will be left holding the bag. Remember that President Obama said he wants to raise corporate taxes on net. Combined with his budget proposal to nearly triple the dividend tax rate, the net effect is likely to raise the hurdle rate on business investment, which means less business investment. Less investment means labor productivity growth slows, and so wage growth slows. In other words, the President would leave American companies less competitive, and he would leave American workers with lower wages.
Tax reform shouldn’t work this way. America shouldn’t work this way. The U.S. corporate tax rate is too high, and real reform can bring it down. Congress and the President should pursue revenue-neutral corporate tax reform centered on, reducing the corporate tax rate, and reducing the tax rate on small, non-corporate businesses as well, and work to make U.S. companies more competitive around the world. That’s a far fairer, far smarter plan than a trapdoor tax policy that benefits the few, the proud, and the privileged.