The president has drawn a line in the sand on reforming a tax code that encourages businesses to move their operations and their profits offshore to avoid paying federal income tax. Obama boldly declared on Monday that he will demand that tax loopholes that allow businesses to claim certain deductions and hide their money offshore be closed, and that financial institutions that facilitate these offshore operations open their records to the US government or become a target. Said the president, “If financial institutions won't cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly.” Sound familiar? But Obama’s proposed War on Tax Havens has been met with stern opposition from businesses and uncomfortable silence from his own Democratic Party in Congress.
There is no question that President Obama’s proposed reform would put American businesses at a competitive disadvantage with foreign companies. Indeed, such a move would eliminate the only incentive that American businesses have to remain tied to America. Obama’s plan ignores or misunderstands the real reasons why American businesses avoid federal income tax. The first reason is that their taxes are too high. US corporate tax rates are the second highest in the world (Japan takes first place), ranging from 35-41%, as compared to 34.4% in France and 25% in communist China. Which leads to the second reason: everyone wants to minimize their tax payments. If there were copious tax loopholes for middle-class Americans that we could take advantage of, don’t think for a moment that we wouldn’t. Businesses are not villainous because they’re keeping their tax payments as low as possible in order to preserve their capital and generate growth. If you’re looking for someone to blame, look no further than your Congress, who writes these insanely complicated and ad hoc tax laws.
The fact that the president’s allies in Congress are trying to avoid the issue belies that they know it would spell economic doom for the US, particularly their constituents. Senate Finance Committee Chairman and Democrat Max Baucus said the proposal requires “further study.” Even ultra-liberal Barbara Boxer has said that a plan should not be adopted that has “unintended consequences.” To be realistic, the president doesn’t stand a chance of making this plan a reality. Businesses will not allow themselves to hobbled in such a way by the federal government and they will make sure that enough Congressional Democrats see things their way to stall the move. The consequences of enacting such a plan would be dire, particularly in a recession with rising unemployment. I’ll go so far as to say the idea is monumentally stupid. This is not to say that the idea won’t resound with many Americans, who like words like “fairness” and feel, now more than ever thanks to the president, that businesses are to blame for many of their woes.
If the president wants to reform the tax code, conservatives are all ears. We’ve been asking for tax reform for quite some time now. But this “simplification” of the tax code amounts to a tax hike on the people already paying the majority of taxes in this country and creates a disincentive for them to operate in the United States at the worst possible time. Like we’ve been saying, President Obama, why don’t we keep tax rates as low as possible right now? It’s not our fault your stimulus plan and budget are wildly irresponsible debt-monsters (well, it’s not my fault anyway).