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Obama’s Tax Reform Proposals Wrong, Politically Motivated, and Will Hurt the Middle Class?

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Voters who go to the polls in 2012 will have two futures laid before them, and nothing illustrates this more than the tax code proposals submitted by GOP-nominee Mitt Romney and Democratic-nominee Barack Obama. Both Republicans and Democrats are going to try to make this race about a lot of other things, but at a fundamental level it is a race regarding what sort of path America is going to take- the one that we’ve been traveling on for the past couple years that the President wants to take us further on, or the alternative that former businessman and now GOP nominee Romney wants to take us on. And nothing illustrates this more clearly than the recent proposals that the two of them put forward on how to properly fund our government.

Via the TaxProf Blog I saw this article that appeared in the Wall Street Journal op-ed section called Romney vs. Obama on Corporate Tax Reform, which does some great analysis of the competing tax reform proposals that both candidates for office have put much work into and submitted for consideration:

The one thing on which our political leaders seem to agree is the need for corporate tax reform. Barack Obama and Mitt Romney unveiled new proposals on the same day last month, with President Obama cutting the top corporate tax rate to 28% and Mr. Romney reducing it to 25%…. Congressional action is bubbling below the surface as well.

This flurry of proposals is a result of increased awareness of how out of step America is with the rest of the world. The U.S. is currently an outlier within the 34-member Organization for Economic Cooperation and Development, with a combined state and local corporate tax rate that is about 15 percentage points higher than the average of our trading partners.

But amid all of the promising rhetoric there is significant cause for concern. Many proposals… seem to have unlearned many of the lessons of modern economics. Three shifts in the economic environment since the 1960s, each recognized by most economists, provide an essential guide to reform.

First, U.S. tax policy can no longer treat the U.S. as a closed economy. Capital and business activity are increasingly mobile across national boundaries and highly responsive to variation in the net tax paid across locations. Second, the word “business” is not synonymous with “corporation”—pass-through (noncorporate) businesses are almost as important in the aggregate as old-fashioned corporations. Third, economic research has stressed that both corporate taxes and investor-level taxes on dividends and capital gains contribute to the tax burden on corporate equity. Investors factor in the total capital tax, both individual and firm level, when making decisions. …

Mr. Obama’s plan, as if designed by Rip Van Winkle, is blind to this major shift and is thus a weak tonic for the flagging economic recovery. While the president proposes reducing the corporate tax rate, other changes that are portrayed as “loophole closing” on multinational firms make his plan a net increase in corporate taxes collected.

Mr. Obama, ignoring the second reality, would also raise taxes on noncorporate business, in the interest of requiring the “rich” to pay for the “privilege” of being an American, to paraphrase a recent statement byTreasury Secretary Tim Geithner.

…While cutting corporate tax rates with his left hand, Mr. Obama would increase tax rates with his right by radically increasing tax rates on dividends and capital gains. Modern economic theory and empirical evidence—including a series of papers by one of us (Hassett) and Alan Auerbach of the University of California, Berkeley—show that raising taxes on dividends at the individual level increases the cost of equity capital and lowers asset prices, harming consumers while hindering firms’ ability to hire workers.

The plans of Messrs. Romney and Santorum have significantly more promise. Both would bring down rates on corporate and noncorporate income, though only Mr. Romney would do so in a revenue-neutral way (the Santorum plan adds greatly to federal deficits). According to one study, a top marginal tax rate on individual incomes of 28% as proposed by Mr. Romney, compared with Mr. Obama’s proposed top marginal rate of 39.6%, would increase the wage bill of noncorporate businesses by over 6%, raise investment by 10%, and push business receipts up by 16%.

Mr. Obama’s tax reform proposal takes a wrong turn in each area and appears motivated by a poor understanding of the impact of capital taxation on business behavior and the welfare of middle-class Americans.

Let me highlight that last phrase, written by American economist Kevin Allen Hassettand Dean of Columbia Business School Glenn Hubbard-

Mr. Obama’s tax reform proposal takes a wrong turn in each area and appears motivated by a poor understanding of the impact of capital taxation on business behavior and the welfare of middle-class Americans.

Original Post:  A Conservative Teacher

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