Beware the President’s Bait-and-Switch on Corporate Tax Reform

Townhall.com ^ | July 31, 2013 | Daniel J. Mitchell

[Kaslin]

In his latest pivot to jobs and the economy, the President spoke yesterday in Tennessee.

Much of his speech was tax-spend-and-regulate boilerplate, but he did repackage some of his ideas into a so-called grand bargain.

He said he’s willing to cut the corporate tax rate in exchange for a bunch of new spending on things such as infrastructure (he didn’t specify whether it would be “shovel ready” this time) and dozens of “innovation institutes” (as if the notoriously sluggish and inefficient federal government can teach the private sector about being entrepreneurial.

In theory, however, such a deal might be worthwhile. It’s not a good idea to add to the burden of federal spending, of course, but if there’s a big enough reduction in the corporate tax rate, it might be worth the cost.

Worse than France? Worse than Greece?

After all, America has the highest corporate tax rate in the developed world and is ranked 94 out of 100 on other measures of business taxation.

But here’s why it’s important to read the fine print. The President wants to give with one hand and take away with the other. Yes, the corporate tax rate would come down, perhaps from 35 percent to 28 percent, but the White House has signaled that businesses would have to accept higher taxes on new investment (because of bad “depreciation” policy) and on international competitiveness (because of misguided “worldwide taxation” policy).

To cite a very simple example, is it a good deal for companies if the corporate tax rate is lowered by 20 percent but then other changes force companies to overstate their income by 25 percent?

In reality, it’s more complex, with some companies probably coming out ahead and others getting hit with a bigger tax bill.

I dig into some of these details in a debate on Larry Kudlow’s CNBC program.

Dan Mitchell Explaining the Need to Look Before You Leap on Corporate Tax Reform

The moral of the story is that it’s not clear whether the tax system would get better or worse under Obama’s proposal.

And if he wants the “grand bargain” to be a net tax increase, then the odds of seeing an improvement drop from slim to none.

So why trade more spending for – at best – sideways movement on tax policy?

P.S. Republicans hopefully learned important lessons about the risks of tax-hike budget deals from the debacles in 1982 and 1990. But if they need a helpful reminder, this chart from the New York Times reveals that the only successful budget agreement was the one in 1997 that cut taxes.

[cripplecreek]

I wouldn’t expect anything different than a bait and switch.