Obama’s New Economic Plan – Part 2
August 1, 2013 Leave a comment
On Tuesday President Obama delivered his first major follow-up address on job creation since unfolding his new economic plan for America in Galesburg, Illinois the previous week. [See my previous post on that speech.]
Obama spoke this time in Chattanooga, Tennessee at an Amazon.com Inc. mega-warehouse, where he praised the company for its initiatives in job creation. The site was a somewhat controversial choice since Amazon has previously been cited for abusive working conditions in its warehouses.
Much of the President’s speech repeated the same themes and language found in his earlier address in Galesburg, and we may expect more of the same as he brings his message to the other stops on his multi-city tour. But he did use the occasion to expand on the first of the five main cornerstones of middle-class security outlined at Galesburg, that of having a good job with decent wages and benefits. He also provided additional details on how he expects to get his job plan approved by Congress. And with a bit of additional research I have been able to piece together some of the maneuvering in the background that underlies his proposals.
Obama had previously announced a series of major employment initiatives in his February State of the Union address. He promised at that time that creating these jobs would not add to the deficit – that expenses incurred in creating these jobs would be offset by other revenues so there would be no net cost to individual taxpayers. The problem has been that Republicans in Congress have been adamantly opposed to approving any additional expenditures, even if they would be offset by other means.
Now the President believes he has found a way around this impasse. He stated on Tuesday,
I came here to offer a framework that might help break through some of the political logjam in Washington and try to get Congress to start moving.
He is even talking once again about a “Grand Bargain.” He is attempting to combine measures that he knows Republicans support with those he knows Democrats will support to achieve legislation that can receive broad enough bi-partisan backing to be approved by Congress.
In his address the President said,
I don’t want to go through the same old arguments where I propose an idea and the Republicans just say, no, because it’s my idea. So I’m going to try offering something that serious people in both parties should be able to support: a deal that simplifies the tax code for our businesses and creates good jobs with good wages for middle-class folks who work at those businesses.
Obama is resurrecting his plan outlined during the 2012 Presidential campaign to cut the corporate tax rate from 35 percent to no more than 28 percent through revisions to the tax code. Republicans are generally in favour of this reduction in tax rates, although they are far from agreement on other revisions to the tax code. Obama seems to be hoping that his proposal will encourage them to get moving on tax code restructuring – something that politicians on both sides of the aisle have been calling for. But there is still a problem. Republicans have insisted that all gains in revenue from closing tax loopholes must be reabsorbed in a lower overall tax rate. Changes to the tax code must not be used to provide any increased revenue.
The Obama administration has also called for the “repatriation” of earnings by U.S. companies that are currently being kept overseas and out of the reach of the IRS. Any recovery of taxes on this estimated $1.5 to $2 trillion in off-shore earnings would amount to a sizeable one-time windfall for the U.S. government. Measures to repatriate and tax these earnings (even at a substantially reduced rate) have broad support in Congress.
In 2004 the U.S. granted a “repatriation holiday” to corporations that returned earnings held overseas, and the business community has been lobbying for another complete tax holiday as the condition for repatriating their earnings once again. But there is considerable resistance in Congress to granting these corporations complete tax immunity on these amounts.
Ezra Klein notes, both the White House and House Republicans have settled on a compromise solution that would impose
a small, one-time fee on all deferred foreign earnings. This isn’t a tax cut for money corporations bring back. It’s a levy on all the money they have sitting overseas, and they pay it whether they bring it back or not. After paying the fee, that money is free and clear so far as the taxman is concerned.
The details of this one-time fee still have to be negotiated, but the President is proposing to use this money to fund a jobs program providing broad employment opportunities in the repair of roads and bridges, in education at community colleges, and in creating new industrial centeres for manufacturing.
Obama’s jobs creation proposal consists of linking these two measures: The president will support a Republican plan for revenue neutral changes to the tax code (eliminating tax loopholes and using the gains to lower corporate tax rates) if they will agree to let him take the additional revenue received from a separate one-time fee on corporate foreign earnings and apply them to his job creation program.
Here’s the bottom line: I’m willing to work with Republicans on reforming our corporate tax code, as long as we use the money from transitioning to a simpler tax system for a significant investment in creating middle-class jobs. That’s the deal.
As MoneyNews reports,
The White House hopes the idea will gain some traction in Congress because Republicans want corporate tax reform and Democrats want spending for infrastructure, so this offers something for both sides.
We should note that Democrats have until now been opposed to the revenue neutral model of reforming the tax code, and want to apply the additional revenues resulting from these tax changes to funding enhanced employment and social programs. They do not want to see this increased revenue disappear again into other tax cuts.
So President Obama met with the Democratic caucus on Wednesday, explaining his proposals to them, and they have now rallied to announce their solid support for his jobs initiative.
The timing of this move has been carefully planned. This Friday Congress goes into summer recess, and both Republicans and Democrats will be returning to their home ridings to meet with their constituents. Democratic members of Congress will be promoting their strong support for the President’s jobs initiative and talking about their own “Make it in America” employment strategy. They will have a positive, hopeful message to bring to their constituents.
And what message will the Republicans be bringing to their constituents? What they have to report on so far is largely a negative campaign: nearly 40 attempts to repeat Obamacare, threats to shut down the government this fall by refusing to pay for current expenditures; the continuation of the sequester which the independent Congressional Budget Office estimates will cost the American economy 750,000 jobs this year and 900,000 fewer jobs next year? That may please their hard-core supporters, but it will not play well before a larger audience.
As the Congress prepares to go on summer recess, President Obama is putting the Republicans on the defensive. It will be interesting to see how this plays out.