In February of 2012, President Obama released a proposal to cut the corporate tax rate by 20 percent—bringing the current corporate rate down from 35 percent to 28 percent (and to 25 percent for manufacturers). But according to Robert Pozen, a senior fellow at the liberal-leaning Brookings Institution, President Obama won’t say how he will pay for his $1.3 trillion dollar corporate tax reform plan.
Obama says his plan is revenue neutral. He promises to make up for the lost revenue from the rate reduction by closing loopholes in the corporate tax code. But Pozen points out that Obama’s corporate tax “framework” only specifically names a handful of loopholes that would pay for only 10 percent of $1.3 trillion cut and then lays out a “menu of options” to pay for the rest:
1. Favorable treatment of carried interest: $13.5 billion
2. Accelerated depreciation of corporate jets: $2.2 billion
3. Oil & gas subsidies: $29.5 billion
4. Moving from last-in-first-out to first-in-first-out: $73.8 billion
5. Reforms to the treatment of insurance companies: $16 billion
That’s $135 billion total if you assume a 35% tax rate—with a 28% tax rate, eliminating these tax expenditures would only raise $108 billion. At this point, Obama is still almost $1.2 trillion in the hole.
And it’s not really even fair to say that ending these specific tax expenditures would pay for tax reform. Obama already counts ending these tax expenditures toward deficit reduction in his budget and counts them once again in his corporate tax reform. Obama unveiled his corporate tax reform “framework” independently of his budget in February 2012. Why Obama didn’t get to work on his tax reform plan earlier—a plan he says will create jobs—is not at all clear.
Obama’s corporate tax reform is still so vague that the Tax Policy Center says it was unable to evaluate it. “TPC has not tried to analyze [President Obama’s] plan,” TPC’s Roberton Williams wrote in an email to THE WEEKLY STANDARD. “He has not provided enough detail for us to evaluate its effects. So we have nothing that would help explain his plan or its effects.”
But isn't that the problem with Romney's income tax reform plan—that it doesn’t provide enough details? Why did TPC do a report on the Romney plan but not the Obama plan?
Williams replied (emphasis added):
We evaluated what Romney said about his tax plan without base broadeners, John, because we wanted to evaluate each of the GOP candidates' tax plans during the primaries as best we could. The tax plans were clearly major differences among the candidates and Romney responded to the others' plans by changing his plan in the middle of the primaries. We explicitly said we were omitting the base broadeners and would reevaluate the plan with them once the campaign made clear what they would be. We included his corporate rate cuts because they were similar in nature to his individual rate cuts--rate cuts offered, pay-fors promised but not specified.
We evaluated the president's plan as laid out in his 2013 budget back in March, shortly after he released the budget. That document is the best statement of what he wants to do with the tax code. His subsequent suggestions that he would cut the corporate tax rate and impose a Buffett Rule on high-income taxpayers were deemed to be not well-enough specified to allow us to examine them.
Of course, it would be possible for TPC to analyze Obama’s corporate tax plan the same way it analyzed Romney’s income tax reform. TPC could figure out how much Obama would have to raise taxes on the middle class or add to the deficit in order to finance his corporate tax cut.
But no one is asking how much Obama might raise taxes on the middle class to pay for a corporate tax cut. That’s because the notion that anyone in American politics would raise taxes on the middle class in order to cut taxes for corporations is risible—just as risible as the notion that anyone would raise middle class taxes to cut income taxes for wealthy individuals.
“There is one obvious rejoinder available to the president and his allies,” writes Reihan Salam. “[I]f further cuts to tax expenditures prove unpalatable, the cut to the corporate tax could be smaller than 7 percentage points. But of course the same could be said of Romney’s income tax proposal.”
Obama also cites the Tax Policy Center to argue that Romney’s tax reform plan is mathematically impossible, but the TPC analysis is deeply flawed. Princeton economist Harvey Rosen’s study shows Romney’s tax plan is mathematically possible under "plausible" growth assumptions. And the Tax Policy Center's own calculations show that Romney's tax plan is mathematically possible if you correct for two or three erroneous assumptions.
So, even as Obama lambastes Romney for not being specific enough on taxes, the president himself leaves a lot of questions unanswered about his own corporate tax reform plan. But the bigger issue here may not be the fact that Obama's tax plan also lacks specifics, but that the rationale of his corporate tax reform proposal undercuts his call for higher income taxes.
Obama is proposing to lower the corporate rate to 28 percent—and 25 percent for manufacturers—but he wants to raise the individual income tax rate—paid by many small businesses—to 40 percent, while carving out more loopholes for small business. Does that make any sense? If lowering marginal tax rates is a good incentive for businesses to be more competitive and increase productivity, then why isn’t it good for small businesses?