Don’t Get Fooled by Obama’s Phony “Grand Bargain”
By Bob Bauman, JD
Last week, President Obama unveiled a supposed “grand bargain.” In the latest of his many roadshow “jobs” campaign speeches, Obama proposed that the U.S. corporate tax code be reformed; the pregnant catch in what he described as his “deal” was that any new revenue from such reform must be used to finance more, and bigger, Obama-government spending programs.
Obama’s plan would take the corporate tax rate of 35% down to 28%, while eliminating deductions and creating a new tax on foreign earnings, effectively giving many corporations a higher tax bill. Not much of a “deal” or “bargain” there for American corporations that already deal with a corporate-tax rate that climbs to over 39% when including an average of state taxes.
According to The Economist, the U.S. has the second highest corporate tax rate in the world, exceeded only by the United Arab Emirates. Even socialist countries in the depressed European Union economies have cut business taxes to an average of 25% in a competitive effort to attract investment and create jobs. Depending on the poll-question wording, the majority of Americans have, for years, endorsed higher corporate taxes, rather than more personal income taxes. “Sock it to those big corporations,” people seem to say. “Big business can afford to pay more taxes — but not me.” But such flawed thinking fails to recognize a critical point - President Ronald Reagan recognized that higher corporate taxes have a trickle-down effect … and not in a good way. In his words: "Some say shift the tax burden to business and industry, but business doesn't pay taxes … business must pass its costs of operations – and that includes taxes – on to the customer in the price of the product. Only people pay taxes, all the taxes. Government just uses businesses in a kind of sneaky way to help collect the taxes. They're hidden in the price; we aren't aware of how much tax we actually pay."
Reagan knew that if Americans understood just how many hidden government fees and taxes are hidden in the price of the everyday goods and services they buy, they would be more than angry. Renowned libertarian Murray Rothbard underscored economic ignorance as a major American problem: “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”
And that ignorance has also infected the halls of Congress. Indeed, our own investment director, Jeff Opdyke, echoed that view, writing: “There should be a law … that anyone who runs for Congress must have passed a basic economics class in college. The level of economic ignorance among those who govern this country is staggering …” We Need Tax Reform That Works President Obama has long talked a good game on “tax reform.” To him, that means “higher taxes on the wealthy,” otherwise known as the “successful and productive.” Yet even he was correct when he said during the 2012 presidential campaign: “If we can ‘fix’ this system, it can have a direct impact on jobs, economic growth, and global competitiveness.”
Members of both major political parties know that the U.S. corporate and individual tax codes need to be reformed, eliminating loopholes, reducing marginal rates and possibly raising additional revenue to reduce the deficit and debt. But, according to the CCH Standard Federal Tax Reporter, as of 2013, it now takes 73,954 pages to explain the complexity of the U.S. federal tax code. That is simply stunning. Real tax reform will require some pain, such as ending or curtailing sacrosanct tax-break provisions like the home mortgage interest deduction. One of the more encouraging proposals is the "Zero Plan" proposed by Senators Max Baucus (D-MT) and Orrin Hatch (R-UT). They want to force Congress to justify current tax breaks or repeal them. That might allow reduced corporate and individual rates while raising needed revenue.
I personally favor a flat tax on personal and corporate income and a “territorial” tax system that only taxes earnings within the United States – simple tax systems that are working successfully in many countries. For more than a year, I have served as a member of the Committee for a Responsible Budget composed of former members of the U.S. Congress. If you want to try your hand at reforming the corporate tax code, check our CRB Corporate Tax Reform Calculator. The bottom line is that we all have a responsibility to be informed tax payers, intelligently assessing pending proposals and lending our vocal support for real tax reform.
In a truly global economy, Obama’s phony “reform” of more taxes to be squandered by socialist planners who redistribute wealth for votes does nothing to improve our competitiveness and hinders the growth of our businesses. And the selfish approach of “tax thee but not me” as it relates to corporate taxes eventually hits us all, as those costs are eventually passed down to us, the consumers. Unless we take action now, the most compelling growth and investment opportunities will continue to be found overseas.