Narrow Political Fixes Don't Solve America's Serious Structural Problems
December 2, 2014
The latest example of President Obama’s reliance on rhetoric over substance was in full view earlier last month after Republicans reclaimed control of the Senate in the midterm elections. The President tried to use language to soften up the American electorate by speaking to the fact that, unlike the last six years, he has plans for Democrats and Republicans to work together during his last two years in office. He focused on two issues—tax reform and infrastructure improvement—precisely because they are the only pressing issues around which there is broad agreement that changes must be enacted.
But, the President has fallen short on a solution for both tax reform and infrastructure by tying the two issues together. He noted, “Traditionally both parties have been for creating jobs rebuilding our infrastructure — our roads, bridges, ports, waterways…I think we can hone in on a way to pay for it, through tax reform that closes loopholes and makes it more attractive for companies to create jobs here in the United States.”
His comments went on to suggest that he favors closing the gaps in the in the Highway Trust Fund with revenues from a corporate tax holiday. A corporate tax holiday, or repatriation, would allow companies to bring profits made overseas back to the United States at a reduced tax rate. This gimmick would serve to plug a temporary hole but fix none of the underlying structural issues with our tax code. With both Republicans and Democrats seemingly willing to work together, an opportunity like tax reform should not be so limited in scope.
The potential benefit from overhauling the outdated corporate tax structure is immense, but the President’s proposal does nothing to address lowering the rate and simplifying the code, and would provide a benefit to only a select few multi-national companies.
Unfortunately, we have seen President Obama use issues related to tax reform for politically expedient short-term reasons before. Earlier this summer, the administration announced measures to curb the staggering rate of inversions through actions by the Department of the Treasury. Secretary Lew instituted several measures—from prohibiting “hopscotch” loans to tightening ownership rules and strengthening spinoff rules—that were aimed at stemming the exodus of major corporations from America’s tax domicile this summer.
However, those actions did nothing to solve the core problem – the United States has the most burdensome and complex corporate tax code in the world. The Administration issued the new rules on inversions partly to score some political points before the November election and partly to appear as though solving the problem when in reality it did nothing of the sort.
Now that the elections are over, President Obama is talking about tax reform once again. It’s easy to see why: to take advantage of the fact that comprehensive tax reform is one of the only issues on which there is bi-partisan consensus. But just like this summer, spending political capital to achieve short-term gains instead of addressing long-term structural problems simply kicks the can down the road. In this case, a corporate tax holiday will do nothing but leave the American public waking up with the post-holiday blues.
Real tax reform won’t be a gimmick, it will be a fundamental understand that it has been way too long since the last tax overhaul (1986) and that corporate and individual tax reform is what will help build a strong economy.