Obama's 'grand bargain' is another dead end

In a speech yesterday in Chattanooga TN, President Obama made congressional Republicans an offer they could refuse. And they did. 

By doing so, Obama may have quashed the last shred of hope that tax reform can happen before the 2014 congressional elections.

In what the White House pitched as a new idea, Obama offered to decouple corporate tax restructuring from individual reform. This is odd since the president proposed stand-alone corporate reform as far back as 2012.   

His latest iteration doesn’t seem much different. Like his earlier plan, it would cut the top corporate rate to 28 percent from 35 percent and eliminate billions of dollars in (largely unidentified) corporate deductions and other tax preferences.  But last year he called for revenue neutral reform (that is, a plan that would raise the same amount of money as the current corporate tax code). This time, he is pushing reform that would generate billions of dollars in new revenue, though it is not exactly clear how.  

While the White House never quite says, Obama may want to pay for his jobs initiative with a tax on foreign earnings that multinationals return to the U.S. during a limited tax “holiday.” But those firms already owe 35 percent when they repatriate those profits. A special low tax of 10-15 percent, which is what he may have in mind, is not a tax hike, it is a tax cut.    

Not surprisingly, this plan is a complete non-starter for Hill Republicans. They also back generic corporate reform, though they too never say what preferences they’d cut to pay for rate reductions. However, they insist that any restructuring of the corporate code must generate the same revenue as today.

Thus, we remain stuck in the same Ground Hog Day rut that has bedeviled tax reform—individual or corporate—throughout the Obama Administration. Obama and the Democrats won’t support reform unless it produces revenue to fund new spending and/or deficit reduction. Republicans won’t support it if it does increase revenue. So there we are.

Obama’s repackaging of an old proposal does nothing to break this impasse. Indeed by explicitly tying reform to a new demand—that the money it raises must be used to pay for new jobs programs—he made a deal less likely, not more.

Stand-alone corporate reform might be more defensible if it were good policy. For instance, a plan to fully integrate the corporate and individual tax makes sense. But this proposal is not that.

Indeed, the plan would further complicate business taxation. Only about 15 percent of U.S. businesses file corporate tax returns.  The rest report their income on their owner’s 1040s. It appears that Obama is proposing to lower rates only for corporations. As a result, many other businesses could lose their tax deductions and credits without the benefit of a rate cut.       

I suspect Obama’s speech was based on a two-pronged political strategy.

First, he is repeating the populist argument he’s been making throughout his recent jobs tour: The GOP is blocking his job-creating plans to protect fat-cat corporations that move American jobs overseas.

Second, he is trying to buy some love from part of the corporate community. Many of his ideas would raise taxes on those multinationals that aggressively shift income to low-tax countries. But trading a discount repatriation tax for a jobs program might attract some.

He may also believe that throwing some jobs money into the pot will win support for reform among the segment of Corporate America that is interested in domestic hiring (and often pays higher tax rates).

Obama’s speech comes against a backdrop of an effort by House Ways & Means Committee Chairman Dave Camp (R-MI)  and Senate Finance Committee Chairman Max Baucus (D-MT) to build support for tax reform. But they’ve made little progress, largely because they too are unable to agree on how much revenue a new tax system should collect.

 Obama didn’t help.

Tax reform can only happen with the leadership of the White House. No disrespect intended, but Dave Camp and Max Baucus are not going to lead the nation down the complex and controversial reform road by themselves.

Rather than backing their effort, Obama seemingly cut individual reform adrift today. The White House fact sheet says only that Obama would support a revenue-raising individual reform as part of a long-term deficit reduction deal. A deal that almost certainly won’t happen soon.

He wants to focus on corporate tax reform which the White House seems to think is easier, but isn’t really. Sadly, he wants to do it in a way that will get no GOP support in Congress. His speech yesterday is another step down another blind alley.