Feb. 14 (Bloomberg) -- Do as I say, not as I do. That was the unwelcome message in President Barack Obama’s federal budget for 2013. The president calls on Congress to begin work on corporate tax reform, including simplifying and lowering the overall corporate rate. Yet his fiscal blueprint doesn’t even hint at how he would achieve that. Instead, he would add new layers of tax complexity.
The $3.8 trillion budget, released yesterday, is stuffed with dozens of tax initiatives, including a tax on millionaires, a $61 billion tax on banks, and various changes that punish or reward specific industries and behaviors. In the unlikely event that congressional Republicans play along, some of the president’s initiatives would do the U.S. little good in the short run, and are unlikely to prepare it for the challenges ahead.
This is a wasted opportunity, even considering that the final budget of the president’s term is largely a political document. The U.S. should be doing more to streamline an already cluttered tax code -- a chief request of business leaders. It would certainly help, too, if voters understood how Obama would overhaul corporate taxes should he be re-elected.
The U.S. has one of the highest effective corporate tax rates in the world, topping out at 35 percent. That rate puts U.S. companies at a competitive disadvantage to trading partners, whose effective taxes are, on average, lower than 30 percent. A higher corporate tax rate makes it cheaper to do business overseas, encouraging companies to send jobs abroad. What’s more, higher taxes are largely passed on to U.S. workers and consumers in smaller paychecks and higher prices.
The administration claims to understand this. Yet its latest budget, which projects a $901 billion deficit in fiscal 2013, perpetuates the clumsy way the U.S. has tried, for decades, to reduce the overall tax rate with ever more credits and deductions. The budget encourages manufacturers, for example, to invest in the U.S. by proposing new deductions for companies that stay onshore and new credits for those investing in hard-hit communities. It would also impose a minimum tax on overseas earnings and make it harder for companies to defer taxes on overseas profits. In total, Obama would spend more than $120 billion over the next decade on tax breaks for U.S. manufacturing.
The president would partially pay for this by ending a tax deduction on domestic oil and gas production, saving almost $12 billion over a decade. That’s a good thing; such companies are highly profitable and able to attract capital on their own. The president would apply those funds toward the more generous tax deduction for manufacturers, and would even double the deduction to 18 percent for high-tech manufacturers. That could raise all sorts of questions about what qualifies as high-tech: Would companies that make iPad accessories, or the packaging they come in, make the cut?
The bigger problem is that tax credits rarely drive corporate behavior, especially decisions as important as a facility’s location. Economists say that other factors, including wages, the availability of skilled labor and proximity to customers, carry more weight and that the Obama tax changes would probably be marginal, at best.
Manufacturing is an important driver of growth, but it’s no secret the industry is doing far more with fewer workers. Productivity has soared even as employment has fallen, with much of the work becoming automated. The sector already benefits from dozens of tax subsidies. Manufacturers in 2008 claimed $12.2 billion, or 66 percent, of the same domestic production tax break that benefited oil and gas companies, according to an analysis by Bloomberg Government.
A better use of limited resources would be to target money to areas that can benefit all U.S. businesses, such as improving labor-force skills. A study by the National Science Board found high-tech manufacturing jobs in the U.S. declined by 687,000 between 2000 and 2010. Many of the jobs went overseas, including to China, and not simply because of lower wages. China now outpaces the U.S. in awarding doctoral degrees and nearly doubled its number of engineering degrees over the past decade. More than 90 percent of respondents in a Harvard Business School survey said the U.S. is either falling behind or just keeping pace in the availability of skilled labor.
More money for training, education, and research and development would be a better way to prepare the U.S. for its long-term challenges. Yesterday’s budget proposes a good start with an $8 billion community college program to train 2 million workers. Congress would be wise to approve this and other training initiatives.
The tax proposals in the White House’s budget seem designed more for political advantage than to put forward the best policy. White House officials hint that a corporate tax overhaul may come later this year -- something they’ve predicted in the past, only to back away. Before asking voters to give him a second term, Obama needs to show how he would fix a fractured system.
Tax reform would be a high hurdle in an election year, particularly with Washington so paralyzed by partisanship. Still, in laying out its priorities, the administration should have aimed higher, instead of making the tax code murkier than it already is.
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