Via Memeorandum, I see that President Obama is proposing to cut corporate taxes if Republicans agree to invest in middle-class job programs. Apparently, it’s part of a Grand Bargain to ward off a budget crisis in the fall. (Quick question for all my American friends, how many Grand Bargains and budget crises can one President have?) On its face, it is a good idea.
The U.S. needs to address the quagmire that is their corporate tax regime. Nominally, they have one of the highest corporate tax rates in the world at 35%, but that’s not what corporations tend to pay. The U.S. has a system of tax breaks that results in far lower effective tax rate for corporations. It’s inefficient and opaque. The convoluted nature of the current tax system means serious, clear reform is difficult, if not impossible. The President would be wise to tackle this issue head on, not treat it as a bargaining chip.
Republicans are wise to view the President’s offer with caution. If his intent is to simply cut the nominal corporate tax rate while at the same time eliminating the the special tax breaks corporations receive, the effect will be essentially neutral. Granted, cleaning up the tax code is always a good thing, and doing so without greatly increasing the tax burden of corporations is good as well, but that’s not really much of a compromise in a Grand Negotiation. (Am I capitalizing the right words? It all seems so silly.)
Further, were I a Republican dealmaker, I’d be quite wary of any sort of “middle class job program”. First of all, if the middle class still exists (and I’m not sure it does), I really don’t know what sort of program would create “middle class” jobs. The devil, as they say, will be in the details.
There is an added danger in entangling these two initiatives. Despite what some politicians will be quick to claim, cutting corporate tax rates is not a great tool for job creation. A cut in corporate taxes, along with a simplification of the tax code, should contribute economic expansion, but it’s a leap to say that that will mean a whole bunch more jobs. (And before anyone asks, no, this isn’t some uber-Laffer argument that tax cuts are always good.) Should the jobs program fail (as so many previous attempts have, sadly) creating a smoldering crater of debt, blame for the increase to the deficit may fall upon the tax cut rather than the jobs program.
In the end, the President should try to fix the corporate tax code (not to mention the entire tax code…a boy can dream, y’know) regardless of any Grand Bargains that come along. The economic benefits are worth it even if it doesn’t help him strong-arm Republicans into supporting the jobs program.
Likewise, Republicans should take this as an opportunity to try to cut the effective corporate tax rate, while eliminating complex tax breaks. This is one of the rare times when a pro-business stance will actually result in better public policy. If the President is serious about cleaning up the corporate tax mess and cutting the effective tax rate, a trade off for a jobs program is probably worth it.
Bonus reading: Scott H. Payne discusses the significance of corporate tax cuts with Laval Professor Stephen Gordon.