Obama’s ‘Grand Bargain’ With Obama

By WSJ, Editorial

He proposes tax reform with higher taxes and not much reform.

In Chattanooga on Tuesday, the latest stop on his economic inequality tour, President Obama made himself an offer he couldn’t refuse. If Congressional Republicans agree to a corporate tax increase, he said, then he’ll agree to spend more money on his favorite public-works projects. If Republicans bargain hard, will he also offer an expansion of ObamaCare as a sweetener?


We know this sounds like an exaggeration, but that’s the essence of what the President proposed as what he called a new “grand bargain.” Mr. Obama will agree to reform the corporate tax code—a GOP priority and one even the President claims to support—but only if the reform raises more revenue and only if he is allowed to spend that windfall on his priorities.

A White House press release clarified that the President would also like to raise taxes on individuals, not just businesses, while allowing federal spending to rise still higher. But showing they retain a sense of humor in the West Wing, the press release suggests that the President is willing to forgo this tax increase for now because he wants to “work with Republicans.”

This isn’t a serious proposal, and he knows it. It also isn’t bipartisan, since he is offering a compromise with appeal to the ideological spectrum running from Elizabeth Warren to Chuck Schumer. Perhaps these are the only Members of Congress whom Treasury Secretary Jack Lew has in his iPhone.

The real bipartisan reform opportunity would be to get behind the chief Senate and House tax writers, Democrat Max Baucus and Republican Dave Camp. They’ve been holding hearings on tax reform for years, and Mr. Baucus has even invited all Senators to send him a list of tax provisions they’d like to retain and why.

The rub for Mr. Obama is that both men conceive of using whatever money they would raise from closing loopholes to reduce tax rates. This is crucial to getting rates as low as possible, especially given that the statutory U.S. corporate rate of 35% (plus state corporate taxes) is the highest in the developed world.

But it is also crucial to making reform politically possible. A reform that merely lowers rates a few percentage points has no chance of building enough support to overcome the opposition of companies and interests that will see their tax loopholes closed.

The problem, as ever, is that Mr. Obama simply can’t get over his ideological fixation to keep tax rates as high as possible. We say “ideological” because his own advisers concede that a 35% rate hurts U.S. business competitiveness. Even Japan, the last high-rate holdout among rich countries, is cutting its corporate rate. But recall the famous moment in the 2008 campaign when then Senator Obama was asked by ABC’s Charlie Gibson if he would support higher capital gains tax rates even if they raised less revenue than lower rates. Mr. Obama said yes.

On Tuesday, Mr. Obama at least conceded the need to transition “to a simpler tax system” for corporations. But his plan is to take the headline corporate tax rate of 35% down to only 28% for most companies, while eliminating deductions and creating a new minimum tax on foreign earnings so that corporations will actually pay a higher tax bill. The White House says that manufacturers will pay an effective tax rate of “no more than 25%,” but that is also likely higher than the effective rate many of them are paying now.

These columns certainly favor a simpler tax code, but compliance is merely one cost of our tax system. The bigger cost is money owed to the Treasury. Reducing the first while raising the other is not a game-changer for U.S. business or for economic growth.

Even for businesses that might find the proposal intriguing, the simplification in Mr. Obama’s plan seems to apply mainly to those that file under the corporate tax system. Most small business owners file under the rules for individuals, which are not being simplified under this plan and whose tax rates Mr. Obama raised substantially in January. Cutting corporate rates without doing so for small businesses will merely increase the opportunities for tax arbitrage.

On the other side of Mr. Obama’s grand bargain, he offered his usual grab bag of spending that would create more union jobs at high Davis-Bacon wages, more teachers, and more job training, though the federal government already runs more than 40 job-training programs that don’t seem to do much training for real jobs. He also wants more subsidies for biofuels and electric cars—the ideas that worked so well in the first term.

All of which suggests that the President’s speeches aren’t really about tax reform or the economy. They’re about preparing the political ground for 2014. On that score, he adopted once again his charming habit of casting those who disagree with him as motivated purely by political spite. No wonder even Democrats want the President out of the room when they try to negotiate on immigration. He’s a deal killer.

A version of this article appeared  The Wall Street Journal.

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