I read President Obama's State of the Union address last week. It started out in the usual way, but on Page 2 I perked up. This was right after the part where he talked about Master Lock and bringing jobs back to the United States.
He said to businessmen: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed. We should start with our tax code.
Whoa, I thought. Hes going to push for corporate tax reform.
The average voter couldnt care less about the corporate tax rate. Obama knows that. But he also wants to get re-elected. Economists on the left keep saying growth is sluggish because consumer demand is lousy, but personal consumption expenditures recovered to their pre-recession level by last summer. The big laggard is investment.
Bringing down the high corporate tax rate would spur more investment and more job creation. In gridlocked Washington, theres wide agreement that something needs to be done.
But back to Obamas speech. He described how companies get tax breaks for moving jobs and profits overseas. Well, yeah. If they keep profits out of the United States they escape the U.S. corporate tax rate, now at 35 percent 39 percent if you count the average state tax.
A tax at that level is a virtual invitation to produce as much as possible overseas. If companies send their profits back to the good ol U.S.A., they get whacked at the U.S. rate even after those same profits have been taxed by the host country. Most countries dont do that. Profit is taxed in the country where it is made, although some countries apply a small levy if its repatriated.
Heres Obama himself explaining it: Companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it. So lets change it.
I was riveted now. This looked like a big shift in Obamas thinking.
Given the sluggish economy, the challenge for policymakers is how to move business psychology from fear of loss to fear of losing opportunity. Reforming corporate taxes would be a huge lift to the animal spirits of entrepreneurs.
More than that, it would be a gateway to wider tax reform to the lower rates and broader base suggested by a presidential commission in late 2010.
If enough loopholes can be carved out of the tax code to bring the top personal rate down to, say, the low to mid 20s, then its possible to talk about getting rid of the capital-gains differential and the lower rate for dividend incomes. Youd have a code in which the debate over a Buffett rate for millionaires becomes irrelevant because Buffett and his secretary would face the same rate, regardless of income source.
But as it happened, I was getting worked up over nothing.
After he said, lets change it, he didnt propose a lower corporate rate. He called for more deductions, loopholes and tax-code complicators: taxpayer help for manufacturers that set up shop in communities hit hard when a factory left town, doubled deductions for domestic high-tech manufacturers, and the real topper a basic minimum tax for all U.S. multinational corporations.
Imagine the gobbledygook that would comprise a legal definition of high tech, or a definition of hard hit communities. Then picture a group of corporate directors after theyve been briefed on the implications of Obamas minimum tax. You can almost hear the wheels turning: Hmm. The tax would whack U.S. companies with overseas profits. So why not arrange to be bought out by a foreign multinational?
Youre forced to the conclusion that this president hasnt the slightest notion of what makes an economy go, how real wealth is created or what motivates people to risk scarce capital on an uncertain future, as the saying goes. And he may be the only person in the country who doesnt believe the U.S. tax code is already complicated enough.