Last week Treasury Secretary Timothy Geithner admitted that the administration’s budget proposal makes no attempt to balance the budget or solve our entitlements crisis over even the long term, and now today the Obama administration has released a business tax reform proposal that can only be described as embarrassing.
It’s not been a good couple of weeks for Obama administration credibility on economic issues.
While claiming to be designed to stimulate economic growth, the Obama business tax reform plan explicitly raises taxes by at least $250 billion over the next 10 years. This is the first clue that the plan is not empirically based, since almost all economic studies demonstrate that higher taxes work against economic growth. In fact, recent research by the OECD demonstrates that corporate taxation is the most harmful to economic growth, followed by personal income taxes and then by consumption taxes.
The President’s plan also ignores the consensus of economists that the burden of corporate taxation is actually borne by workers and consumers. In other words, corporations simply pass their tax burden through to workers in the form of lower wages and to consumers in the form of higher prices. This isn’t nefarious, it’s just economics. Corporations do not pay taxes—people pay taxes. So, since higher taxes on corporations are really higher taxes on workers and on consumers, the Obama plan does not “protect the middle class,” as it claims, but rather raises taxes on them.
The Obama plan actually exacerbates the global competitiveness problem in our corporate tax code. It would improve our ranking from worst to only fourth worst, still higher than Germany, the U.K, Canada, and almost all other international competitors. This is not progress. And the Obama plan explicitly rejects a move toward a territorial tax system, which most economists recommend as a key element to enhance our global competitiveness.
The proposed minimum tax on foreign income, for which there is no comparable tax policy in any advanced economy, ignores everything we’ve learned from the harm of the alternative minimum tax and doubles-down on the problems caused by a worldwide tax system. Further, it is intended to stifle the beneficial international tax competition that has improved economic growth and raised living standards around the world.
One could almost predict that any plan emanating from this administration would favor “clean energy production” while attacking oil and gas, but targeting what they call “excess profits” on intangible assets such as intellectual property seems an odd provision of a tax plan for an information economy.
In short, with everything we know about the impact of tax policy on economic growth and international competitiveness, as a business tax system for the 21st Century this plan is an embarrassment--albeit just one more in a long list of economic policy embarrassments.