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Federal Government

An Unambitious Bargain

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President Obama has announced a series of new economic proposals[1], including a “Grand Bargain” on reforming corporate taxes, which seek to head-off the looming debt- and budget stand-off in Congress; a.k.a. the GOP suicide pact. Central to the deal would be a reduction in corporate tax rates from 35% to 28% and to 25% in manufacturing; this would be achieved by the closure of a number of corporate loop-holes and a change in the interest deductibility rule. The President is also keen on a one-time tax of the roughly $2 trillion in corporate profits held overseas, which would be used to fund undefined job creation initiatives.

 obama

The President’s plan specifically leaves out any shift away from the taxation of global earnings towards a territorial system favored by most businesses. Most OECD nations currently use a modified form of the territorial system to tax their corporations.[2]

This is a good beginning for discussion, though the proposal is relatively unambitious. One is left with the sensation that the President is again positioning himself as a compromiser with proposals that are doomed to failure; but visibly so, to exert the maximum pressure on House Republicans. Even if this is so, it is the GOP’s fault that they have become so uncompromising and so allergic to any negotiation with the President. As an opposition party, they are a disaster: they are only worse when they are in charge. If anything, the President should have continued with his previously announced preference for a truly sweeping reform that included corporate and individual income taxes.

What would a truly ambitious “Grand Bargain” look like? It would include most of the following elements:

1. Reduction of corporate tax rates to 15% or lower;
2. Realignment of corporate taxation towards domestic business activity with reasonable precautions against “shifting” of domestic activity to overseas vehicles or holdings;
3. Reduction in the individual income tax rates for lower- and middle-income Americans;
4. Simplification of the individual income tax (see “The 5-Minute Tax Reform”) with a uniform tax rate for all forms of income, including capital gains and dividends;
5. Introduction of a Federal value-added tax (see “3.4 ‘VAT’ Until We’re Debt Free”);
6. Introduction of a Federal carbon tax (see “A Vision Without Vigor”) with elimination of all subsidies to the energy industry;

These measures would not only raise more revenue than the current tax regime through a broadening of the tax base, they would reduce costs of enforcement and lost productivity; reduce uncertainty among businesses, investors and individuals; realign the American economy towards greater energy efficiency without the distortions of subsidies or the inefficiencies of heavy-handed regulations.

Along with the Affordable Care Act and the pending immigration reform, a complete tax overhaul would prepare the American economy to compete and win in the XXIst Century. More would be needed, but the basic and fundamental building blocks would be in place.

Yet is too much to hope for the GOP to see the light, and to put the nation’s interest ahead of their own narrow partisan ones. Their confusion of the two is not only leading to the downfall of their party, it is costing the American people time, money and effort which we can ill afford.



Sources and Notes

 [1] Goldman, Julianna, “Obama to Call for Business Tax Overhaul in Grand Bargain,” Bloomberg, 30 July 2013
[2] de Rugy, Veronique, “Corporate Income Tax Rates in the OECD,” Mercatus Center at George Mason University, 09 May 2011

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