Tuesday, President Obama proposed a “grand bargain” as part of his jobs tour (a tour that marks the third anniversary of Vice President Biden’s “Recovery Summer” tour). The grand bargain is relatively simple: corporate tax cuts (to 28 percent), including a one-time lower tax on profits earned overseas that would arguably entice firms to repatriate these funds and provide a temporary spike in revenues. These revenues, in turn, would be used to promote additional stimulus projects (a White House fact sheet can be found here). As President Obama explained (White House transcript):
But if we’re going to give businesses a better deal, then we’re also going to have to give workers a better deal, too. (Applause.) I want to use some of the money that we save by closing these loopholes to create more good construction jobs with infrastructure initiatives that I already talked about. We can build a broader network of high-tech manufacturing hubs that leaders from both parties can support. We can help our community colleges arm our workers with the skills that a global economy demands. All these things would benefit the middle class right now and benefit our economy in the years to come.
Oddly enough, the New York Times was unimpressed: “only the packaging was new. The president essentially cobbled together two existing initiatives that have been stalled in Congress: corporate tax changes and his plan to create jobs through education, training, and public works projects.”
As one might guess, the editorial board of the Wall Street Journal offers a more pointed critique.
President Obama made himself an offer he couldn’t refuse. If Congressional Republicans agree to a corporate tax increase, he said, then he’ll agree to spend more money on his favorite public-works projects. If Republicans bargain hard, will he also offer an expansion of ObamaCare as a sweetener? …Mr. Obama will agree to reform the corporate tax code—a GOP priority and one even the President claims to support—but only if the reform raises more revenue and only if he is allowed to spend that windfall on his priorities.
There have been serious bipartisan discussions of tax reform—simplification, elimination of various loopholes or tax expenditures—led by Senator Max Baucus (D-MT) and Congressman Dave Camp (R-MI). But these efforts appear to be of little interest for a simple reason. As the Wall Street Journal notes: “The rub for Mr. Obama is that both men conceive of using whatever money they would raise from closing loopholes to reduce tax rates.” The additional revenues would not be available to fund administration projects that have failed to gain traction in Congress.
The Economist has a useful overview of the tax reform efforts of Baucus and Camp, which focus quite correctly on tax expenditures. They distort market signals, create perverse incentives, and reward transfer seekers who have been the most successful in accessing the political system. At the same time, they deplete revenue to the tune of $1.1 trillion a year (compared with total revenues of $2.8 trillion).
In the end, the key question is an important one. Should the money generated through the elimination of expenditures be dedicated to further reductions in the tax rate, thereby promoting private sector investment, or should it be used as a source of funding for additional federal programs? President Obama has clearly revealed his preferences in this matter. As the White House fact sheet states: “The bottom line is that the President will work with Republicans on a package to simplify our business tax code so long as it includes real investments to help restore middle class security, create jobs and grow the economy.”