James Pethokoukis

Politics and policy from inside Washington

Deferral Drama: Why Obama corporate tax reversal hints at a VAT

October 13, 2009

Many ideas that may have momentarily seemed like smart policy earlier this year — when rage at Wall Street and Corporate America hit a fevered pitch — didn’t survive a bit of calm reflection ((and intense business lobbying.). Like that 90 percent tax on executive bonuses. Or nationalizing the banks.

Both are certainly strong nominees for “worst idea of the year.” But they have a worthy challenger in the Obama administration’s previously announced intention to limit the ability of U.S. companies to defer the repatriation of overseas income. Probably seemed a terrific twofer at the time: a nice bit of populist political posturing (this is, after all, the “Benedict Arnold” tax break that Democrats love to harp on) that would also bring in some $200 billion over 10 ten years.

Total win-win, right?

So why then is the White House now apparently dumping the whole idea? Partly because of — you guessed it — intense business lobbying of both the administration and Congress. Technology CEOs who supported candidate Obama and congressional Democrats were, by all accounts, particularly persuasive.

They had an easy economic case to make, however. Not only would the tax plan hurt American corporate competitiveness (most other countries don’t tax their companies’ overseas profits), the changes would be a de facto $20 billion- a- year tax increase on business during a time of profound economic weakness. Bottom line: the tax changes were in no way incentives to add American jobs at a time when unemployment is climbing toward 10 percent. In this case, wealth and job creation trumped wealth redistribution and revenue raising.

Great decision by the Obama White House.

But while this was one instance where “more of the same” was better than the proposed change, the corporate tax status quo should not be preserved. For one thing, business income taxes are a lousy way to finance government. Studies show that somewhere between 45 percent and 75 percent of the corporate tax burden is shouldered by workers in the form of lower wages. And big taxes and tax subsidies encourage businesses to make decisions based on accounting benefits rather than for economic efficiency and productivity reasons.

Earlier this year, a group of centrist economists sponsored by the Tax Foundation put out a wish list of proposed corporate tax changes. Among them: lowering the corporate tax rate, broadening the tax base and permitting faster write-offs of business investment. Smart ideas all.

Or, they suggested, you could replace America’s sky-high 35 percent corporate income tax with a value-added tax of 5 to 6 percent. And that idea hints at the other reason why the White House may have scuttled their original tax plan. Obama supporters and fellow travelers have been launching trial balloons all over Washington promoting a VAT to deal with Uncle Sam’s huge budget deficits. And if that is the direction the White House wants to go, why spend the time and political capital on a corporate tax increase that may only be temporary?

So dumping the deferral limitation plan is both good economics and good politics, at least for now.

There’s your win win.

Comments

Very good article. Nice job representing us Greeks!

Posted by Manolis Sfinarolakis | Report as abusive
 

Interesting also are the projected VAT revenues from a 5% broad based VAT as suggested by a recent CBO report. If you were to wipe out Corporate taxes altogether and create a VAT with a standard rate of say 15%, the US would be debtfree in 20 years.

Posted by PeteKL | Report as abusive
 

btw, TWH is denying that any of the CIT changes have been shelved.

http://www.nytimes.com/reuters/2009/10/1 3/us/politics/politics-us-obama-corporat e-taxation.html

Posted by PeteKL | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •