What Obama Needs to Do to Save the Economy
by William O'Keefe
July 21, 2011
In a little-noted comment during his press conference this month, President Obama said “one of the most important things we can do for debt and deficit reduction is to grow the economy.”
He’s right about that. In all the talk about debt reduction, economic growth is too often given short shrift, despite the fact that—as the Congressional Budget Office notes—a mere 0.1 percentage point change in annual economic growth would cut 10-year deficits by more than $300 billion.
Unfortunately, several of the debt reduction proposals the president has offered involve tax hikes on corporations that would only hamper growth, handicap our ability to compete globally, lower tax revenues, and exacerbate the problem we’re desperately trying to solve.
In his talks with Republicans, President Obama has proposed a $72 billion end to the so-called last-in-first-out tax provision, a $43 billion tax hike on U.S. oil and gas companies, and in his February budget, the president called for $129 billion in higher taxes on overseas profits.
Raising taxes on corporations during good economic times is a risky proposition, but it’s certainly ill advised at a time when the economy is struggling find its footing after a prolonged and deep recession. Higher taxes simply reduce investments and employment. It’s a simple as that.
While the White House claims, for example, that denying credits for foreign taxes paid under the so-called “dual capacity” provision would raise $10.7 billion over 10 years, it would almost certainly backfire because, as former Treasury official Pam Olson explained, it “would put U.S. companies at a significant disadvantage to their foreign competitors.”
Likewise, targeting the oil and gas industry for tax hikes—under the guise of eliminating “subsidies”—would do more harm than good. Daniel Yergin, chairman of IHS CERA and points out: “Taxation systems don’t exist in a vacuum in an increasingly competitive world. The unintended consequences of proposed changes would likely accelerate the shrinking position of U.S. companies internationally.”
Louisiana State University’s Joseph Mason calculates that eliminating the so-called Section 199 deduction for the oil and gas industry, combined with ending the dual capacity credit, would actually result in a net loss of $54 billion in tax revenues.
Like it or not, U.S. companies have choices. And if the business tax climate is too unfavorable in America, many will simply move operations elsewhere. Already, companies like Google have moved certain parts of their operation to countries such as Ireland, which boast taxes that are a mere fraction of the United States’ rate.
Transfer pricing involves calculating how much profit is made by a company in each country in which it operates, when contributions to the final product — be it parts, patent rights, services or funds — may come from one or more affiliates abroad.
That’s just a fact of life, one we’ve seen here at home, where companies are busy moving out of high-cost states like California—a state that CEO magazine recently listed as the worst state in which to do business—to more business-friendly ones.
University of Michigan economist Mark Perry has developed an informal measure of this trend, noting that U-Haul charges are far higher for one-way truck rentals leaving California than they are for rentals heading to the Golden State.
And while raising taxes on companies—particularly oil and gas firms—might appeal on an emotional level, they only exacerbate a more fundamental problem with the way we tax businesses in the United States.
As it stands, we have the worst of both worlds when it comes to corporate taxes. Our tax rates are second only to Japan, and could soon be the highest in the world if that country follows through on its promise to cut corporate rates.
At the same time, we have a massively complex tax system—riddled with special interest tax loopholes—that lets companies pay less than the advertised rate, but at a cost of $40 billion a year to comply, and many billions more in economic distortions.
President Obama’s own Economic Recovery Advisory Board concluded as much in a report issued last August, noting that “the combination of a high statutory rate and numerous deductions and exclusions results in an inefficient tax system that distorts corporate behavior in multiple ways [that] have deleterious economic consequences.” And as former President Clinton recently admitted his own corporate tax hike was a mistake and that “we’ve got an uncompetitive rate.”
Mr. Obama himself has recognized the need for tax reform, calling on Congress in his last State of the Union address to “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate.”
The problem is the president hasn’t forcefully pushed this idea since then, focusing instead of specific corporate tax hikes that will only make the job of tax reform all the harder. If the president does not have the political courage to do that, he can reduce the heavy costs of regulation by a serious streamlining of the regulatory system, especially EPA.
In the end, if President Obama really wants to “grow the economy,” he and the rest of Washington need to focus on policies that will boost investment and growth in domestic firms. And the best way to do that is to cut corporate taxes, not raise them.