Grading the President’s Jobs Council on Corporate Tax Reform

January 19, 2012 at 11:27 am

The President’s Council on Jobs and Competitiveness, a group consisting mostly of business executives that advises the President on ways to strengthen the economy, released its year-end report this week.  That report included a section on corporate tax reform, an issue that has generated significant attention in recent months and that Congress may consider this year.

While the report is obviously not a full proposal, it’s worth examining whether the Council is heading in the right direction on some of the key tests for corporate tax reform proposals that we outlined here.  Below is how we would grade the report in four key areas:

  • Raising additional revenue. The United States is on an unsustainable fiscal path and will face wrenching policy choices in the coming years.  In addition to restraining health costs and other spending, we will need to raise taxes.  Unfortunately, the Council largely ignores this harsh reality, merely observing in a “final word” at the end of the report that the retirement of the baby boomers will “affect the role of revenues.” Grade:  Fail
  • Encouraging investment in the United States. The Council calls for lowering the corporate tax rate, arguing that this would help American businesses and workers.  At the same time, however, some members sent strong signals that they would move to a “territorial” international tax system, under which foreign profits of U.S. multinationals would face a zero tax rate.  (The report does not make a final recommendation, noting that its members were divided on this point.)

    Giving foreign profits a massive and permanent tax advantage over domestic profits would create a strong incentive for multinationals to move investment and profits offshore.  And, given budget constraints, eliminating taxes on overseas profits would create pressure to set taxes on domestic investments higher than they would otherwise be.  Grade:  Incomplete

  • Reducing the tax code’s bias toward debt financing. The report observes that “because interest is a deductible business expense, the corporate tax system favors debt financing over equity financing.”   Encouraging corporations to rely excessively on debt poses risks for both the firms and the broader economy, as the recent financial crisis highlighted.  A key priority of any corporate tax reform should therefore be to reduce tax subsidies for debt.  The Council’s report highlights the bias in the current system stemming from the full deductibility of interest. Grade:  Pass
  • Broadening the corporate tax base by reexamining the boundary between corporate and non-corporate taxation. The Council’s report highlights that, despite its high statutory corporate tax rate, the United States collects little in corporate income taxes relative to other members of the Organisation for Economic Co-operation and Development.  We rank 25th, out of the 29 OECD members for which such data are available, in corporate taxes as a share of the economy.

    The report points out that a major reason is that about half of business income is not even subject to the corporate income tax.  A growing number of business owners have opted to organize their firms as partnerships and S corporations, which means the firm’s profits are “passed through” to the owners. These owners benefit from the same tax deductions and credits as corporations do but pay taxes only at the individual level.

    Reining in this arbitrary tax preference needs to be a major focus of tax reform.  While the report made no final recommendation on this point, the Council draws attention to this important issue. Grade:  Pass

Three Things for Congress to Remember When Voting on the Debt Limit

January 18, 2012 at 11:16 am

With the President’s announcement last week, the debt limit is about to rise — automatically — unless Congress enacts a law freezing it at its current level.  While lawmakers may not enjoy allowing a debt limit increase, they all should keep the following facts in mind:

  1. Raising the debt limit allows the government to pay the bills it has already incurred, not incur new ones. As we pointed out last summer, “the amount of debt outstanding reflects Congress’s [previous] tax and spending decisions and the state of the economy, not the level of the debt ceiling.  Citizens who urge their members to vote against raising the debt limit as a way of expressing displeasure with federal borrowing are picking the wrong target.”
  2. Congress has already enacted spending cuts that fully offset the automatic debt-limit increase. Last August’s Budget Control Act called for $2.1 trillion in cuts over the next decade, which will occur through caps on annual discretionary (non-entitlement) spending and automatic cuts in many programs starting in 2013.  It also authorized a $2.1 trillion increase in the debt limit, to occur in three installments; the President’s announcement last week triggered the last of the three.  While we disagree strongly with the concept (reflected in the Budget Control Act) of making debt-limit increases contingent on an equal amount of deficit reduction, those spending cuts will take effect unless Congress votes to block them.
  3. A vote to freeze the debt limit increase is a vote for default. Congress can prevent the automatic debt-limit increase with a two-thirds vote in both the House and Senate.  But if it does, the federal government will default within a matter of months — roiling financial markets, boosting U.S. interest rates immediately and perhaps markedly, and probably sending the U.S. and global economies into a deep tailspin — unless it can immediately start running budget surpluses instead of deficits.  Opponents of raising the debt limit haven’t offered a plan to accomplish that.

And no wonder — preventing the debt from rising would require some combination of budget cuts and tax increases totaling about $1.2 trillion per year, to take full effect immediately. To achieve that goal, Congress could cut all federal programs (including Social Security and Medicare) by one-third, or raise all taxes (income, payroll, gas, etc.) by more than 45 percent.  Macroadvisers, a highly respected economic forecasting firm, wrote last fall that balancing the budget immediately would have a “catastrophic” impact, convert the sluggish economic recovery into an extraordinarily deep recession, and double the unemployment rate.

A first-ever U.S. default would mark a profound change in the nation’s global standing, change perceptions of U.S. debt as the world’s safest investment, and trigger an almost certain economic disaster; immediately cutting the deficit by about $1.2 trillion per year would trigger a different kind of economic disaster.  In short, a vote not to raise the debt limit is simply irresponsible.

Unemployment Insurance Funds Should Go for Unemployment Insurance

January 17, 2012 at 5:47 pm

As the House returns from its holiday break today, a key early task for it and the Senate is to agree on extending the payroll tax cut and federal unemployment insurance (UI) through the end of 2012.  House negotiators may seek to include a provision the House passed in December, which would allow the federal government to authorize up to ten states each year to use UI funds for purposes other than paying benefits.

As we explain in a brief new paper, that would undermine UI’s fundamental purpose since its creation in the 1930s:  providing “temporary, partial wage replacement as a matter of right to involuntarily unemployed individuals who have demonstrated a prior attachment to the labor force,” as a bipartisan, blue-ribbon commission put it more than a decade ago.

States already have considerable flexibility over the design of their UI programs.  Federal law just lays out a few basic requirements, principally that states use UI funds only to pay UI benefits and not impose excessively burdensome “methods of administration” that block access for otherwise eligible individuals.

These requirements ensure that all states maintain programs that offer a basic level of protection to workers with a sufficient employment record who lose their jobs through no fault of their own.  States are free to choose and adjust employer tax rates, benefit levels and duration, and eligibility criteria.

The House proposal goes well beyond giving states “flexibility” — it alters the fundamental nature and purposes of the UI program itself.

Letting states divert UI funds for other purposes would start the UI system down a slippery slope, even if those other purposes might benefit some unemployed workers, such as providing additional job training.  Among other things, states could replace state or local funds now used for job training or other such purposes with diverted UI funds and then shift the withdrawn funds to other uses, including tax cuts.  The net result could be a reduction in unemployment benefits with little or no offsetting increase in employment services.

Similarly, waiving the prohibition against excessively burdensome administrative obstacles would enable states to reduce UI benefit costs and tax rates by making it harder for eligible people to participate in the program — a less overt way to cut costs than shrinking benefit levels or the number of weeks of benefits.

Finally, the House provision could also allow states to impose new eligibility requirements not directly based on workers’ employment history, such as requiring UI recipients to have a high school diploma or GED.

Job training, adult education, and other such services are important, but they should complement UI benefits, not replace them.  These programs are heavily oversubscribed in many areas and often have waiting lists; they have also been hit hard by state and federal funding cuts.  If policymakers want to enable more unemployed workers to participate, they should invest in these programs to ensure they are effective and more widely available.

The Facts on SNAP — Again

January 17, 2012 at 3:31 pm

Newt Gingrich’s ongoing criticism of the rise in food stamp enrollment under President Obama has brought more public attention to the program, formally known as the Supplemental Nutrition Assistance Program (SNAP).  As we noted last week, we have updated two key papers that provide background information on SNAP:

  • Policy Basics:  Introduction to SNAP.  In 2011, SNAP helped almost 45 million low-income Americans to afford a nutritionally adequate diet in a typical month.  Nearly 75 percent of SNAP participants are in families with children; more than one-quarter are in households with seniors or people with disabilities.  While SNAP’s fundamental purpose is to help low-income families, the elderly, and people with disabilities afford an adequate diet and avoid hardship, it promotes other goals as well, such as reducing poverty, supporting and encouraging work, protecting the overall economy from risk, and promoting healthy eating.
  • SNAP Is Effective and Efficient.  SNAP caseloads have risen significantly since late 2007, as the recession and lagging recovery battered the economic circumstances of millions of Americans and dramatically increased the number of low-income households who qualify and apply for help from the program.  Yet, despite the rapid caseload growth, SNAP payment accuracy has continued to improve, reaching all-time highs (see graph).  Moreover, the Congressional Budget Office predicts that SNAP spending will fall as a share of the economy in coming years as the economy recovers and temporary benefit expansions that Congress enacted in 2009 expire.

Note: The Center on Budget and Policy Priorities is a non-partisan organization and takes no position on political candidates.

In Case You Missed It…

January 13, 2012 at 5:12 pm

This week on Off the Charts, we focused on the federal budget and taxes, state budgets, food assistance, and low-income housing assistance.

  • On the federal budget and taxes, Robert Greenstein debunked the claim by Republican presidential candidate Mitt Romney that most federal spending on low-income programs fails to reach beneficiaries.  Chuck Marr urged Congress to shrink the “tax gap” by taking steps to boost the collection of taxes that are already owed.
  • On state budgets, Nick Johnson warned against recent proposals to raise taxes on poor families while slashing them for the wealthiest households.  Michael Leachman summarized our joint report with the ACLU on state corrections spending and listed examples of cost-saving criminal justice reforms.  Phil Oliff noted that while state revenues are improving, states still face a long and uncertain recovery.
  • On food assistance, Dottie Rosenbaum highlighted two newly updated papers providing background information on SNAP, formerly known as the Food Stamp Program.
  • On low-income housing assistance, Douglas Rice explained why a proposed expansion of the Moving to Work block grant program would be a mistake.

In other news, we released reports on Mitt Romney’s charge that most federal low-income spending goes to overhead and bureaucracy, improving budget analysis of state criminal justice reforms, and the danger of expanding the Moving to Work housing initiative.