Sen. Max Baucus, a Democrat from Montana and the chairman of the Senate Finance Committee, wants to cut corporate tax rates. But he’s finding that corporations are lining up to criticize his proposal.
As it happens, they’re right to: Baucus’ misplaced priorities have resulted in an unnecessarily complicated and self-defeating plan.
There’s bipartisan support for lowering the 35 percent federal corporate tax rate, which is among the highest in the developed world. Both parties see the rate as a burden for the economy because it pushes investors — American and foreign — to seek their returns in other countries. Economists argue that the tax therefore depresses wage growth in the U.S., a claim supported by numerous studies.
Yet business lobbyists are still complaining, for several reasons. The details of Baucus’s plan involve adding complexity to the tax code. It’s vague about where the rate would end up, aiming to get it somewhere below 30 percent. And it doesn’t make the clean shift that some activist groups (and economists) favor away from “worldwide” and toward “territorial” taxation.
The U.S., unlike most countries, taxes multinational companies based here on all their income as soon as it enters the country, regardless of where it was made. Most countries tax these companies on the income they make inside their territory. The Baucus plan generally moves away from territorial taxation, imposing significant levies on income before it even enters the country.
These features are not, however, the plan’s main defect. To pay for the reduction in the tax rate, the Baucus plan slows the rate at which companies can write off the cost of investment. This trade-off may have been made merely to get the numbers to work, but its effect is to favor past investments over future ones.
Consider a company that is still seeing payoffs from an investment it made and wrote off years ago. It enjoyed a relatively speedy depreciation schedule and will now face lower taxes on its returns: a clear-cut tax reduction. Companies that made investments pretty recently and are still in the process of deducting the expenses will be grandfathered in and the cost of those investments will be written off on the old schedule. So they, too, will get a clear-cut tax reduction.
A company that makes investments under the new rules, on the other hand, will have a lower rate on its future profits but will also get slower write-offs on its investments. Because the reform is designed to be revenue-neutral, the lower taxes on old capital will have to be balanced by higher taxes on new capital. That means the reform will favor older and established companies over startups. So the startups will have a higher total tax burden than they would have had without the reform.
This feature of the plan vitiates much of the purpose of the reduction in the corporate tax rate. Today’s high corporate rate harms the economy by inhibiting investment. To reduce the rate in a way that raises taxes on new investment is self-defeating.
That’s another way of saying that reducing the corporate tax rate shouldn’t be the most important objective of reform. Baucus isn’t the only one to overemphasize that goal. Republicans have tried to differentiate themselves from Democrats on tax reform chiefly by driving the corporate rate even lower. But if what you want is a corporate tax code that applies a lower rate than the current one but raises the same revenue, increasing taxes on new corporate investment becomes hard to avoid.
A better approach would be to scrap this whole way of thinking about corporate taxes and start over. The goal should be better treatment of business investment, which the current code treats much worse than consumption. Rep. Devin Nunes, a California Republican, has a proposal that would treat business investment much better and sustain revenue by ending the tax break for corporate debt. Nunes also wants the corporate rate to decline, but his idea would be a step in the right direction even if it did not.
Businesses that rely heavily on debt would oppose anything resembling this idea, of course. That’s fine. The goal of reform shouldn’t be to make any group of businesses happy but to create a more rational tax code and a stronger economy. Like the Baucus plan, a pro-investment, anti-debt reform would produce winners and losers in the business world. At least in this case, though, they would be the right winners and losers.
Ramesh Ponnuru is a Bloomberg View columnist, a visiting fellow at the American Enterprise Institute and a senior editor at National Review. To contact the writer of this article: Ramesh Ponnuru at firstname.lastname@example.org.
My advice to Minnesota Republicans for 2014
BY STEPHEN B. YOUNG
The 2014 election year is nearly upon us. Elections for governor and a U.S. senator will garner most of the attention. Incumbent Democrats are running for re-election to these statewide offices. How should Republican challengers best present themselves to Minnesota voters in order win more votes than their Democrat opponents?
Next time I will offer equally unsolicited advice to Gov. Dayton and Sen. Franken as to their campaigns.
To me the Republicans have a party problem, not a problem with individual prospective candidates. The Republican brand needs work, both here and nationally.
But the stature of Republicans in the public mind can’t be constructively addressed until factional strife within the party is resolved — one way or another.
I see Republicans torn in three directions: so-called mainstream or “big tent” Republicans who stand less on dogma and more on winning votes and cutting deals; the older social conservatives, who very much overlap with conservative Christian congregations; and, third, the newer and younger tea party libertarians mobilized by Ron Paul.
Strident and uncompromising joint opposition to the Affordable Care Act has brought about a quasi-alliance between the Christian social conservatives and the libertarians. These two factions are also drawn toward each other by common distrust of the moderates, those they disparage as ”Republicans in Name Only.”
The social conservatives and the libertarians provide the Republican Party with its base vote and its most energized activists. But this “base” acts as a cultural force that can’t speak effectively to moderates and independents in general. So swept up are they by their own feelings of righteousness, this base coalition most often dismisses out of hand the legitimacy of making common cause with anyone outside their ideological fortress.
One salient feature of the modern GOP base, revealed in the 2012 presidential elections, is that it has become too much the creature of a “white tribe” — a large but no longer dominant sub-culture within our changing ethnic and racial make-up as a pluralistic people.
Speaking mostly for traditional white, Protestant values, with some help from Catholics in and around life issues, the Republican base is isolated from younger Americans, women and minorities. Its stance on immigration, especially, gets the base branded as an exclusive club, closing its door to new members. White social conservatives and libertarians have not found a way to obviously open up their old-fashioned conception of patriotism to new Americans, leaving those increasingly numerous voters to vote only along the lines of self-interest and ethnic solidarity against that Republican base.
It has been proven time and again in recent elections that the Republican party base can’t win elections unless it gets some votes from moderates and independents.
Of course, this is equally true of the Democrats’ core voters as well, leaving us nationally with a divided electorate and the politics of gridlock. Moderate Republicans, on their side, are generally loath to mingle with social conservatives and libertarians. But since they are outside the base of the party, they can’t even get their leaders nominated as candidates.
The superficial lesson to be learned from American history and from the workings of parliamentary democracies in other countries is that to be successful in politics, you must build coalitions of convenience.
But I am not sure such a strategy will work today for Republicans in Minnesota. Even if the three Republican factions find a formula for coalescing, that will not do much to change the value of their brand and bring to them moderate and independent voters. Their various candidates for governor and the U.S. Senate are not polling well against Dayton and Franken.
Republicans need something more than a coalition among themselves. They need a new beginning, a new voice, and a new vision to guide them toward the emotional grounds to initiate a new beginning.
So, my advice to Republicans is to work on your vision. What do you have that speaks to all Americans?
A middle class mission
The reality that worries many Americans — especially young, independent and minority Americans — is the decline of the middle class. This socio-economic trend speaks to jobs and to values. It challenges the American ideal of a society with opportunity for all. People want and need an economy that creates jobs when, importantly, government can never create enough employment even if extortionate taxes were to be imposed on the top 10 percent of income earners and owners of wealth.
What solutions do Republicans have for this lack of jobs?
On the values side, a middle class with good jobs and a secure economic future stands behind self-sufficiency and personal responsibility. When economic conditions are good, families are more likely to stay together, and children will be raised in the kind of households admired by many in the Republican base.
The Republican Party, therefore, should become the advocate for the middle class. Its core litmus test would become something other than legal restrictions on adult sexual practices and root and branch opposition to taxes and government spending. The new Republican litmus test would be, how does any policy or any program or any expenditure improve prospects for the middle class?
Here is where libertarianism can play an important role. A political party of and for the middle class must be populist in the sense of opposing crony capitalism. Such a party must stand up for the property rights of individuals, and it must distinguish between real property rights and mere entitlements to government transfer payments.
Entitlements are not jobs; they do not build up the self-reliance and self-esteem needed by a true middle class.
Therefore, from time to time at least, the new Republican Party should stand up against special pleadings seeking to protect the economic welfare of the top 10 percent — or 1 percent — of wealthy Americans. These Americans can fend for themselves in most instances.
These days the Obama Administration’s ties to Wall Street might be stronger than Republican affiliations there. Wall Street Republicans belong mostly to the wasting-away subculture of moderate Republicans. For the Republicans to take on “Wall Street” with gusto and new policy initiatives would open the door for them to take the lead on behalf of middle class interests and values.
The “piece de resistance” of Republican advocacy for the middle class would be a new Homestead Act whereby individuals could borrow funds today to buy ownership shares in industry and pay off the loans over time with dividends earned on the shares.
Now Minnesota Republicans cannot campaign on their ability to change federal programs and policies, but a Republican candidate for the U.S. Senate could indeed build a vital campaign around the mission of bringing new ideas to Washington to help the middle class.
In 1948, after all, a young mayor of Minneapolis took his ideas on racial justice to a national arena and made a difference for the country that we look back on with pride and admiration.
Today’s Republicans could learn a constructive lesson or two from Hubert Humphrey’s high-minded idealism and his self-image as a spokesperson for causes larger than his own career or self-serving utterances.
The Republican who runs against Mark Dayton to be our next governor could seek out policies and programs — educational achievement, transportation improvements, investment funds for small and medium enterprises — that will open up prospects for a middle class here in Minnesota. The litmus test applied by such a Republican administration would be, again, does it promote a stronger, more self-confident middle class?
A Christian dimension
There is a role in this task for those elements of the Republican base who consider themselves privileged witnesses to certain Christian truths. Today, before sitting down to write, I attended services at an old New England Protestant church in Boston on the first Sunday of Advent. The traditional liturgy admonished us to “cast away the works of darkness and put on the armor of light.” In other words, to become more righteous in the ways of the Biblical Lord of Hosts, we are to become “enlightened.”
What, then, can guide us to enlightenment and so more fittingly motivate us in politics as well as in religion? May I suggest that, after the first commandment to love God with all our heart and soul, it would be the second commandment – to care for our neighbors with the fidelity that we use in caring for ourselves?
Jesus revealed that to follow those two commandments is to draw very near to the kingdom of God.
Concern and compassion for others witnessed in politics leads to a politics of compromise and coalition, of outreach and communion with many, with all who are our “neighbors.” It demands humility — that we refrain from assuming we know it all.
Another way of making my point is to recall the teaching of Micah that: “What does the Lord require of you, but to act justly, to love mercy, and to walk humbly with your God?”
As the advent liturgy reminded me, the second commandment should cause us to acknowledge that we have “followed too much the devices and desires of our own hearts,” “left undone those things that we ought to have done,” and done things which we ought not to have done.
A politics of inclusion, therefore, makes sense for all of us both as a matter of practical goodness and as special point of Christian ministry.