President Obama says he wants to cut the corporate income tax rate while closing “loopholes.” But – as is often the case on taxes – it’s best to heed what he does, not what he says. Obama has supported – often stridently – most of the biggest “loopholes” in the current corporate income tax code. Unless he is willing to end manufacturing tax breaks, low-income housing credits, and ethanol subsidies, his loophole-closing talk from the State of the Union and his speech to the Chamber of Commerce is just more Obama jabberwocky on taxes. The Tax Foundation analyzed Treasury Department data on “tax expenditures” that benefit corporations – the sort of deductions, credits, or special rates that could be called “corporate tax loopholes” – and concluded that there wasn’t much revenue to be gained by closing them. But ending these credits and deductions would still be good policy for reasons Obama articulated to the Chamber: “You’ve got too many companies ending up making decisions based on what their tax director says instead of what their engineer designs or what their factories produce.”
This perverts the free market, allocating resources not where there’s demand, but where there’s the best tax treatment. Obama is right to criticize the mess, but what will he do about it?
The single largest “loophole,” according to Treasury data, involves multinational corporations. These companies can defer taxes on some foreign income by deferring dividend payments.
The history and reasoning behind this “loophole” are confusing, but here’s a clear sign Obama isn’t serious about changing it: The league leader in such deferrals is General Electric, which is famously close with the administration and whose CEO Obama has tapped as jobs czar. According to Bloomberg, GE deferred taxes on $75 million from 1999 to 2009.
“Loophole” No. 2, depriving the U.S. Treasury of $59.8 billion in revenue over the next five years, is even more untouchable: tax-free interest on municipal bonds. Obama has been hustling for two years to bail out states and cities – through the stimulus bill, a separate state and local bailout, and most recently a proposal to forgive the states’ interest payments to Washington. What are the odds he’ll start taxing corporations for keeping these governments afloat through muni-bond purchases?
Next in line is a manufacturing and extraction subsidy, called the Domestic Production Activities Deduction. There are good arguments for ending special tax treatment for manufacturing, mining, and farming, but this wouldn’t quite jibe with Obama’s export initiative, and his National Greatness Liberalism in which he paints the U.S. government as the activist business partner with U.S. manufacturers.
Instead of closing this “loophole,” Obama wants to take it away from certain beneficiaries – oil companies. When Obama talks of ending oil and gas subsidies, he mostly means excluding domestic drilling and natural gas from the “production” tax break – hardly making the tax code more neutral and sensible.
Ethanol tax credits and low-income housing credits – both of which Obama favors — round out the top six “loopholes.” But it’s worth returning to oil, because this is where Obama’s sleight of hand on taxes comes clearly into focus. He calls it a special subsidy that oil and gas drilling is treated like forestry, farming, and mining, while his proposal – simply discriminating against oil and gas – would be actual “special treatment.”
Obama calls special treatment “fairness” and fairness “special treatment.” It’s one more reason we should doubt whether he’s serious about tax reform.
And here’s yet another: In addition to the big “loopholes” that he won’t change, Obama has created and proposed a bevy of new targeted tax credits that complicate the tax code and distort the economy.
The stimulus included an Investment Tax Credit for windmills, paying companies to install the windmills even if they never spin. The bill created tax credits worth hundreds of millions of dollars for installing solar panels, buying electric cars, and manufacturing things Obama wants you to manufacture.
And one of Obama’s two applause lines before the Chamber on Monday was a call to make permanent the tax credit for research and development – favoring research and development over, say, capital improvements, dividends, wages or marketing. It’s another case of distorting the market to fit Obama’s vision.
Obama can talk “tax reform,” but not while he’s also trying to manipulate the tax code in order to shape the economy. During the Chamber speech, National Journal reporter Tim Fernholz noted “one man’s loophole is another’s job-creating innovation driver.” Trouble is, both men are named Barack Obama.
Timothy P.Carney, The Examiner’s senior political columnist, can be contacted at [email protected]. His column appears Monday and Thursday, and his stories and blog posts appear on ExaminerPolitics.com.
