For most of the past three years, the entire city of Washington has been obsessed with reducing the federal budget deficit. While a concern over projected red ink may have been warranted in the past, the quest for an elusive “grand bargain” on the deficit has crowded out discussions of other pressing economic concerns.
Fortunately, over the past several weeks and months, it appears that change is afoot. With deficit projections dramatically improved but unemployment still stuck above 7 percent and middle-class families still struggling to get by, President Barack Obama is rightfully pushing lawmakers in Washington to turn their attention to what should have been their primary task all along: economic growth and job creation. To that end, last week the president called for a new kind of grand bargain—one that seeks to break the political logjam and foster actions to strengthen the middle class and create jobs now.
The president’s proposal is a compromise, as any bargain must be. It includes a package of job-creating investments that aim to rebuild America’s infrastructure and increase education and training through new manufacturing-innovation institutes and community-college investments. In exchange, he’s offered to accept a broad overhaul of the corporate tax code that would lower the corporate tax rate—something conservatives in Congress have long desired—and close loopholes and shrink special tax breaks such that the overall reform does not result in any long-term increase in revenues.
This is a significant concession. Corporations are making record profits, yet they are paying lower tax rates than middle-class families struggling with high unemployment and stagnant wages. Total federal revenue collected from the corporate income tax is historically low—and low compared to other countries. Meanwhile, austerity budgeting has demanded sacrifice upon sacrifice from American families, while asking nothing of wealthy corporations. Comprehensive corporate tax reform should ensure that corporations pay their fair share, instead of locking in our current low revenue levels forever. It’s also worth noting that the American people agree.
But conservatives in Congress don’t agree. They’ve been pushing for a revenue-neutral reform that lowers the marginal tax rate for corporations. With stagnant median wages, overall unemployment at 7.4 percent, and youth unemployment at a staggering 16.3 percent, according to the Census Bureau, immediate action on job creation should be Congress’s top priority—not tinkering with the corporate tax code. Nevertheless, the president is trying to get his political opponents to come to the table on a jobs bill, and he’s willing to give them something big in return for their cooperation.
Furthermore, the president has indicated that his proposed package of job-creating policies would not add to the federal budget deficit. Understandably, there has been some confusion over how revenue-neutral tax reform can pay for a jobs bill. That confusion has led to some mistaken conclusions about what the president has proposed.
Any corporate tax reform that lowers the marginal tax rate but aims to avoid blowing a hole in the budget over the long term will inevitably result in a temporary bump in revenues over the first few years of the transition. Here’s why: If policymakers cut the corporate tax rate, there will be a lot less revenue as a result. The Joint Committee on Taxation, for example, has estimated that a 10 percentage-point reduction in the marginal tax rate will cost more than $1.2 trillion over the next 10 years in lost revenue. If the goal is to keep the revenue level the same, policymakers will have to make up for the lost revenue by reforming corporate tax expenditures. Because reforms to some of the largest corporate tax expenditures—accelerated depreciation and the deferral of taxes on offshore profits—raise more money in the first few years than they do over the long run, almost any comprehensive plan will generate a short-term increase in revenues. This is not a gimmick, and it doesn’t need to involve any special one-time fees. It is merely the natural result of any major corporate reform.
The question, then, is simply this: What should be done with this temporary revenue? There are three basic choices:
- Further lower the corporate rate. Policymakers could use the short-term temporary revenue to lower the overall rate even further. But the upfront revenue would quickly fade, while the revenue losses from the lower rate would persist. In other words, using the temporary revenue to lower the rate even more would end up losing a lot of revenue, giving corporations an unaffordable long-term tax cut.
- One-time deficit reduction. Policymakers could use the extra revenue to simply reduce the deficit over the next few years. But because this revenue is temporary, it won’t have much of an effect on the long-term deficit. And everyone from Fix the Debt’s Maya MacGuineas to Federal Reserve Chairman Ben Bernanke agrees that further immediate, short-run deficit reduction is unnecessary and counterproductive.
- Use it to pay for something worthwhile. Policymakers could take the short-term revenue and invest it in something useful. That’s exactly what the president has proposed we do.
This package clearly represents a huge compromise for progressives. The corporate income tax is one of the most progressive parts of our federal tax code, and corporate reform should restore its role as a major source of federal revenue. But the president is absolutely right that “we just have to stay at it—more good jobs that pay decent wages, a better bargain for the middle class, an economy that grows from the middle out.”
If conservatives in Congress cannot even accept their own tax reform framework in exchange for modest investments in job creation that add nothing to the deficit, it is clear that they will not accept anything that the president proposes.
Kitty Richards is the Associate Director of Tax Policy and Michael Linden is the Managing Director of the Economic Policy team at the Center for American Progress.