(U.S. Government Photo of Speaker John Boehner and President Barack Obama via Flickr)
Is tax reform the GOP’s ace in the hole to restore its credibility on the economy? The Republican establishment seems to think so. But there’s been little thought of how this approach could backfire and further damage the party’s brand. That will happen if the GOP obsesses over corporate tax reform, which is a solution to a problem -- businesses failing because of taxes – that doesn’t really exist.
Big businesses are thriving thanks to low interest rates, robust capital markets, and their skill in cost-cutting in the wake of the ’07-’09 recession. The Federal Reserve’s monetary stimulus has shifted the dynamics of the real economy to favor large companies that finance themselves in the stock and bond markets and reward investors with dividends and share buybacks. Yet many conservative policymakers obsess over the uncompetitive U.S. corporate top tax rate, which has remained at 35 percent as countries across the world have chipped away at their rates in recent years.
At a recent regular gathering of supply-side Republicans, a former assistant secretary for tax policy at George W. Bush Treasury Department voiced the will of the group: a lower corporate rate paid for by a new value added tax. This would make the American tax code more like Europe’s, which favors corporate ownership at the expense of the individual.
Not only is this shift generally unappealing to most Americans, it presents a particular political challenge to Republicans who have lost voters’ trust on the economy. How do you tell voters that we need to cut taxes for their employers when profits are surging and real median household income is flat? The Bush Treasury alumna says that we just need to educate them that companies are people, too. Good luck with that.
American middle-income wage earners – the type of swing voters that the GOP needs to win to be competitive again – have been battered by a payroll tax increase, higher prices on household goods, and a sluggish job market. Talking about global tax competitiveness and an export-led recovery are not going to resonate with people that are struggling to make ends meet. This is why so many voters are inclined to accept Obama’s “we’re all in this together” framing – simply because it at least relates to their lives, in contrast to the alternative.
The disconnection between GOP economic policy and what is happening in the trenches of the American economy has led some party leaders to overreact, and mimic the other side. In a speech at the American Enterprise Institute in February, House Majority Eric Cantor sounded like Bill Clinton, proposing a laundry list of tweaks on education, taxes, and health care. Paul Ryan vowed to take on poverty in his first major post-election speech at the Kemp Institute dinner. The rest of the GOP caucus in Congress is adrift. Many have picked up the issue of tax reform, only to drop it when they found it didn’t resonate back home.
House Ways and Means Chairman Dave Camp and Senate Finance Chairman Max Baucus (a Democrat) say they are hard at work on a tax overhaul in the bipartisan spirit of 1986. On the individual and corporate sides, the proposal will likely have lower rates paid for by sacrificing tax expenditures. If this kind of bill advances in Congress, it would be a welcome development and deliver a boost to the economy as soon as it looks likely to become law.
But every major conservative economic proposal should be evaluated right now on how its answers the economic problems voters are complaining about – joblessness, rising prices, stagnation. Most voters look at tax reform as something that is good policy, but not urgent. If Republicans get caught favoring corporations over individuals in a tax code rewrite, they will look even more out of touch than they do now.