State of the Union: Wasted Opportunity on Taxes

          The State of the Union address on Tuesday evening contained very few proposals by the President. As I wrote in my last piece, Mr. Obama has basically given up trying to lead or govern the country. He has become a shrill caretaker running for re-election. There are numerous reasons for this sad state of national affairs. Take your choice depending on your viewpoint.

 However, since I have spent my professional life involved in the vagaries of the Federal tax system-both from a technical, policy and political prospective- the few proposals he did make bear commenting. It should be noted the Federal Budget to be submitted sometimes in mid-February  (not to be passed or even considered by the Democrat-controlled U.S. Senate) will contain many more proposals on the revenue side, most of them submitted and rejected before by Congress.

The President main focus in his campaign speech to Congress was to urge enactment of high tax levies on the “wealthy”. This has been a constant theme and the President has been consistent in wrapping this mantra in some nebulous concept of fairness. This “tax the wealthy” chorus is mostly a political argument of the liberals but the conservatives (who favor low rates) have also lost their way. 

In a continuation of his war on multi-national firms, the President also proposed that U.S. companies with foreign operations pay a minimum tax on overseas profits. A company would have to pay a difference between their foreign tax and the new unspecified minimum tax. This is a backdoor attack on foreign income deferral often derided by the Administration. Their frontal assaults have been a failure.  In this case, the Administration goal of trying to encourage jobs and domestic expansion by U.S. companies is understandable but this proposal is misdirected. The corporate tax system needs an overhaul, not some new minimum tax of unknown complexity. This is a nonstarter.

As a stick, as opposed to a carrot, the President wants to deny companies a business expense deduction for costs associated moving a company’s operations overseas. This proposal is not going to have an impact as companies make these kinds of decisions based on other factors rather than a measly business expense deduction. Sounds tough but not effective to achieve the objective.

 In a similar vein, the President wants a new tax credit to cover moving expenses for companies closing production overseas that brings jobs back to the U.S. Same problem, same result. Companies will make these kind of decisions based on business decisions, not some cheesy tax credit. The thought process goes like this—let’s see—I can get a tax credit to close my profitable plant in X so I can come back to a place where labor costs are high, taxes are high and environmental regulation is oppressive. Easy choice.

The Administration continues to want to direct an industrial policy and pick winners and losers. In another case, the President proposed to reduce tax rates for manufacturers, with extra breaks for high-tech. A real sop to his Silicon Valley supporters. Reviving manufacturing is a great goal but in order to do so requires so much than a selective tax break. It will take a good, robust business environment to revive this sector. This type of tax policy will not work, and is a waste. Instead, revise the entire corporate tax system and create a better business climate where business has the ability to expand and grow. These companies have shut down, moved overseas for a reason and this type of proposal will not solve those issues.

The President has proposed a set of largely discriminatory, ineffective, and complicated tax provisions. He misses the point: The tax system needs to be improved, reformed and changed. I did not hear any of that.  It does not need more special interest punishments and dubious incentives to select one form of business over the other, to instill favored government businesses. That is not the way to make an economy “built to last” or whatever that absurd catch line was.

Alas, a wasted opportunity of real progress to be made on tax reform to actually help business, help the economy and help the country.  

 

 

 

Comments

[freelance writing]

This is not good. We can't be wasting opportunities on taxes. The government should try something to resolve the problem.