Obama will be unveiling a Not-So-Grand Bargain at a speech today. The new deal would cut corporate income taxes down from 35% to 28% (and a special 25% rate for manufacturers). This would be made up by closing loopholes. The deal would also create a temporary windfall that would be used for infrastructure and education spending. Even before the details of the plan came out John Boehner rejected it, saying it was just more taxing and spending.
My concern about this deal is not its specifics. In general, the deal sounds pretty good. What’s more, real conservatives should love it. The problem is that I don’t trust future lawmakers. As we well know from experience, it is a lot easier to introduce loopholes into the tax code than it is to change rates. The standard rationale for exchanging loopholes for lower rates is that it is fairer. But the business community—especially the big players—are not interested in that. They want lower rates so that they can pay less. They assume (rightly) that they will later be able to get preferential loopholes. So that’s the problem: the deal would be good for a while, but soon we would have just as many loopholes but a lower tax rate. And then we will again be offered the deal to get rid of the loopholes if we lower the corporate tax rate down from 28% to 20%. And on and on. (Note: we could better replace the corporate income tax by taxing dividends as regular income.)
But okay: this deal is not too bad and is actually great compared to a lot of ideas Obama has had. And I can think of two ways in which this deal is a good thing. The first is clear from John Boehner’s instant hostility towards it. In a normal political environment, the head of the opposition would feel it necessary to at least give lip service to the proposal. “I have not seen the details of the proposal, but the Republican Party has long been in favor of lowering corporate taxes, which are at the highest level of any of the G-20 countries.” See how I made that sound reasonable while throwing in a totally deceptive conservative talking point? Anyway, Obama may just be playing Boehner and his caucus to make them look even more intransigent than they already are. After all, this Not-So-Grand Bargain is more a Teeny-Tiny Itsy-Bitsy Bargain. Corporate taxes don’t even make up 2% of federal income taxes. So Boehner saying that the deal leaves “small businesses and American families behind” is just silly and it looks that way too.
The other thing that is good about this proposal is that it shows that the administration may actually have learned a little bit about negotiating. It includes things that Obama is doubtlessly willing to trade away. But I don’t want to overstate this. The truth is that the administration has done this before, but it has been so eager that it’s traded things away too early in the process. Also: I fear that the White House may be willing to trade away all of the infrastructure and education spending. If that’s the case, then this deal breaks down to nothing but the corporate tax changes the Republicans have long wanted. That would not only risk greatly lowering corporate taxes over time, it would do almost nothing to promote economic growth.
In the end, I’m sure that the Republicans will simply be against this even though it is a good deal for their corporate backers. But it involves working with Obama and that would look bad to the base. I’m sure that the Republicans figure their corporate backers have nowhere else to go. (I’m not sure that’s the case; the Democrats are bought and sold by them as well.) The one thing that defines the modern House Republicans is that they are not willing to give up anything to get everything they want. I’m sure that will turn out to be the case here. So Obama will once again be shown to be the adult in the room. The question is whether the mainstream press will even notice.