Obama's corporate tax cut deceit

Alan Reynolds:

In the final days of the campaign, Barack Obama continues to land the same sucker punch on taxes he used in the debates -- and John McCain continues to take it on the chin.

In the last debate, Sen. Obama said, "We both want to cut taxes, the difference is who we want to cut taxes for. . . . The centerpiece of [McCain's] economic proposal is to provide $200 billion in additional tax breaks to some of the wealthiest corporations in America. Exxon Mobil, and other oil companies, for example, would get an additional $4 billion in tax breaks."

That $200 billion figure is false. Yet FactCheck.org and most reporters never bothered to ask Mr. Obama where he came up with it. FactCheck.org did discover that Mr. Obama's claim about "$4 billion in tax breaks for energy companies" came from a two-page memo from the Center for American Progress Action Fund -- a political lobby headed by John Podesta, former chief of staff to Bill Clinton, with tax issues handled by two lawyers, Robert Gordon and James Kvaal, former policy directors for the John Kerry and John Edwards campaigns. Those lawyers confused average tax rates (after credits and deductions) with the 35% statutory rate on the next dollar of earnings, so that cutting the latter rate from 35% to 25% would supposedly cut big oil's $13.4 billion tax bill by 28.5%, or $3.8 billion. That is not economics; it is not even competent bookkeeping.

The Committee for a Responsible Federal Budget, by contrast, correctly notes that, "Senator McCain has called for the repeal and reform of a number of tax preferences for oil companies," which would raise the oil companies' taxes by $5 billion in 2013.

When fact checkers do look into campaign claims on taxes, they invariably cite estimates from the Urban Institute and Brookings Institution's Tax Policy Center (TPC). The TPC estimates that the McCain corporate tax cuts would lose $734.7 billion of revenue over 10 years (2009-2018). Mr. McCain would also allow immediate expensing through 2013 for equipment normally written-off over three to five years, but no deduction for interest expense if the investment was made with borrowed money. Once equipment has been written-off in 2009 or 2010 it can't be written-off in later years, so the estimated revenue loss over 10 years is only $45 billion, or $4.5 billion per year. Altogether, that adds up to $78 billion a year in corporate tax cuts, not $200 billion.

Yet the $78 billion TPC estimate is also nonsense because it's entirely static. The estimate assumes raising or lowering corporate tax rates has no effect on corporate decisions about where to locate production, income or costs, and no effect on the economy's performance. If that made sense, the corporate tax rate could be doubled to 70% and the only effect (according to TPC estimates) would be to double corporate tax receipts. Such a static analysis is obviously worthless, yet it is nonetheless crucial to the TPC's estimates of the revenue supposedly lost from the McCain plan and its alleged distributional effects.

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One of the ideas behind lower the corporate tax rate is to give companies incentives to do more of their business in this country and thereby pushing up employment and GDP. I think that make sense.

One of the other myths of corporate taxation is that it does not effect the rest of us. The fact is that corporate taxes are paid by all of us. When you fill you gas tank you are not only paying fuel taxes at the pump but a portion of the other costs are taxes. That is why I argue that corporations don't pay taxes, they merely collect them. With a lower tax rate the corporation can lower prices to be more competitive or hire more employees to find more product to sell. Both benefit consumers..

It is not surprising that Democrats are dishonest on taxes. It appears to be part of their DNA. While most of us are not rich and will not have to pay at a higher tax rate, those who do will have less money to spend on goods and services that many of us provide. They may also layoff employees to cover the higher operating costs.

What is troubling about Obama is that he seems to have no concern about the law of diminishing returns which applies to taxes as well as the sale of goods and services.