It is fitting that President Obama released his 2016 budget on Groundhog’s Day. Like Bill Murray’s character Phil Connors in the famous movie, Obama is stuck in an endless loop where he keeps pushing economically destructive tax hikes that have little chance of becoming law.
This is the seventh budget he has released, and each of them had trillions of dollars of tax hikes that would needlessly increase the tax burden on American families and increase the already bloated size of the federal government.
This year’s headline-grabbing and nonsensical tax hike targets U.S. multinational businesses. Obama wants to apply a 19 percent minimum tax on their foreign income going forward and a 14 percent tax on the foreign income they previously earned but have not yet returned to the U.S. (and therefore have not paid their U.S. tax on yet).
Businesses would have to pay the minimum tax each year. Thus, it would end the long practice of deferral, which applies extra U.S. tax to foreign earnings only when businesses return those profits home. It is unclear from the text of the budget if businesses could continue to use their foreign tax credits, or if the minimum tax would apply on top of the foreign tax businesses already pay. Either way, ending deferral and raising taxes on foreign income will reduce investment by U.S. business both abroad and here at home. The result will be fewer jobs and lower wages for U.S. workers.
This tax hike is so perplexing because the U.S. already has the worst corporate tax system in the developed world. We have the highest rate, 15 percentage points above the average of our competitors, and we are effectively the only nation in that group that taxes the foreign income of our businesses.
We should be lowering the corporate tax rate and moving to a territorial system that would not tax overseas earnings to put our businesses back on competitive footing. However, by raising rates on the foreign income of our businesses, Obama’s proposal goes in the exact opposite direction.
This is an especially alarming development because corporate tax reform was supposed to be one area of potential compromise between Obama and the new Congress. Obama has said he is interested in doing it and even has a framework of a plan. These new proposals reduce the already slim chances of advancing much-needed reform.
Obama is sure to argue that the policies he is proposing are similar to ones proposed by Republicans, such as in former Chairman of the House Ways and Means Committee Dave Camp’s tax reform proposal last year. However, like in many of the president’s policies, the context matters immensely.
Camp’s proposal was part of a tax reform plan that established a territorial tax system. As part of that system, anti-base erosion and profit shifting (BEPS) policies are necessary to stop U.S. businesses from shifting too much U.S. income abroad. Obama proposing BEPS policies without simultaneously moving to a territorial regime is like trying to install a security system on a house that has not been built yet.
The president is also likely to argue that his tax on unrepatriated earning is a tax cut, since he would apply a lower rate to them than under current law. This is nonsense. By deeming the money repatriated and forcing businesses to pay tax on it, he is forcing businesses to pay tax on money they never intended to bring back to the U.S. and therefore would never have paid tax on.
The tax hike on multinationals is supposed to pay for half of a six-year, $478 billion highway and transit program reauthorization proposal. Obama wants to dramatically increase spending on underutilized mass transit rail systems and federal grants to local rail, road and port projects. Concentrating transportation decision-making in Washington is the wrong way to go; states, localities and the private sector know the mobility needs and consumer preferences on the ground. Obama’s proposal would give them less control over their transportation funding and spending when they need more.