President Obama’s Corporate Tax “Solution”

It can be summed up in just four words: more of the same.

President Obama wants to reform the corporate tax code. Great! We welcome his late entry into this debate! However, what he has proposed should worry all hard working Americans across the country.

The Heritage Foundation outlined a proposal – Saving the American Dream – to completely overhaul the federal government, including tax reform. Heritage produced a revenue neutral plan which would cut the corporate tax rate from 35% (the second highest in the developed nation) down to 25%. It would also remove loopholes and deductions, unlike President Obama’s proposal that eliminates some and creates others.

This would do three things. First, it would remove special interests from the tax code, making it more fair for all businesses. Second, it would allow businesses to spend more money creating jobs than trying to understand their tax liability. Third, it makes the U.S. more globally competitive, thereby increasing job creation and wages here at home.

The President’s plan initially goes in that direction, but then takes a sharp turn left that will end up damaging our economy. The plan drops the corporate tax rate from 35% to 28%. It also removes some loopholes and deductions, but as is so often the case, the devil is in the details.

The current problem with the tax code is that it is so complicated that it is difficult to traverse. It is also filled with politicians’ decisions on which companies should “win” and which should “lose.” Essentially, Washington has been deciding for decades which companies should be allowed to thrive with a lower tax burden, and which should be punished with a higher tax burden. President Obama’s tax plan would make this divide even greater.

The President wants to close loopholes, credits and deductions for industries he doesn’t like (obviously oil and gas…but have you noticed gas prices lately? gutsy move) and gives more loopholes, credits and deductions to industries he does like (“green” energy, of course). The President also wants to further lower the tax rate for manufacturing companies (many of which are unionized) to 25%. Why shouldn’t every business in America get the 25% tax rate?

Because the President envisions America differently.

President Obama sees an America – in the immediate future, if he has his way – where everyone either works for a unionized manufacturing plant, or a unionized “green” energy plant. An American where our cars run on sunshine and cool breezes, and companies can afford to hire and retain employees with greater than minimum wages and greater productivity with a tax rate higher than any other developed nation.

Well, most people outside Washington live in the real world. Cars are nowhere near ready to run on “green” energy and still be commercially viable (electric cars are more expensive than traditional cars, and don’t perform as well). No one knows whether manufacturing will ever be the driving force of our economy like it once was, but desperately clinging to the hope  that it will (especially while simultaneously attacking so-called drivers of global warming) only misallocate priorities from successful sectors of the economy.

The President also wants to impose a minimum tax on foreign earnings for U.S. multinational companies. This would be a first-in-the-world tax, and absolutely cripple U.S. companies. The Heritage Foundation’s J.D. Foster explains:

“President Obama, however, wants to make an economically harmful policy worse by taxing U.S. companies’ foreign earnings even more heavily. The vision Obama outlines is to punish firms that outsource jobs and incentivize ‘insourcing.’ The net effect, however, would be quite different. The net effect is to put a ‘for sale’ sign on every profitable U.S. multinational company. The buyers, however, won’t be U.S. companies. The buyers will all be foreign companies.

“The reason for this tax-induced fire sale is fairly simple: The reach of U.S. tax policy into income earned overseas extends only when it applies to U.S. companies. The U.S. has no taxing jurisdiction when it comes to the foreign earnings of foreign companies. For example, the U.S. taxes Toyota on what Toyota earns in the U.S. But the U.S. does not tax Toyota on what Toyota earns in Japan.”

The President’s plan is expected to raise $250 billion over the next decade (no doubt it will be used to increase spending), which means that he is actually proposing to hike taxes on businesses in our fragile economy.

Now, what is revenue-neutral tax reform? Basically it removes all loopholes, deductions while lowering rates so that the economy as a whole does not suddenly experience a massive tax hike. This ensures that they don’t have to spend millions on accountants to find these loopholes and can reallocate fund

The National Retail Federation (NRF) and the Retail Industry Leaders Association (RILA) have said that the President’s plan should reform the tax code to make it fair for all businesses, instead of continuing the same practice of picking winners and losers. This isn’t what’s best for America, it simply continues the government-knows-best status quo.

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