Thousands of migrants try to reach Britain from France through the Channel Tunnel. Turkish airstrikes target Kurdish militants. And President Barack Obama wraps up a five-day trip to Africa. A panel of journalists joins guest host Susan Page for analysis of the week's top international news stories.
The Obama administration proposes lowering corporate tax rates but eliminating many popular deductions: what the plan would mean for overall tax revenues and American competitiveness.
- Isabel Sawhill senior fellow, Economic Studies, The Brookings Institution.
- Edward Kleinbard professor of law, University of Southern California Gould School of Law
- Peter Morici professor of International Business at the University of Maryland, former director of economics at the U.S. International Trade Commission.
- Siobhan Hughes reporter,Wall Street Journal
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The Obama administration yesterday announced a reform plan that includes an overall cut to the corporate tax rate. It also eliminates certain deductions. Joining me for a look at competing proposals for reforming the U.S. tax code and their impact on the presidential campaign ahead: Siobhan Hughes of The Wall Street Journal, Isabel Sawhill of The Brookings Institution, Peter Morici from the University of Maryland, joining us by phone, Edward Kleinbard of the University of Southern California Gould School of Law.
MS. DIANE REHMDo join us, 800-433-8850. Send us your email to firstname.lastname@example.org. Send us a Twitter. Join us on Facebook. I look forward to hearing from you. Good morning to all of you.
PROF. PETER MORICIGood morning.
MS. SIOBHAN HUGHESGood morning.
MS. ISABEL SAWHILLGood morning.
PROF. EDWARD KLEINBARDGood morning.
REHMSiobhan, if I could start with you, how much do we really know about the president's plan?
HUGHESWe know both a lot and not very much at all. We know that the corporate tax rate would be reduced to about 28 percent. We know that, for manufacturers, Mr. Obama would like a rate of about 25 percent. We know, for example, he would like a minimum tax on foreign earnings. We don't know what that rate would be at all. We know, for example, he wants to do something about the deductibility of interest payments, a huge issue. We have no idea how he plans to go about that, so there's both a lot and a very little.
REHMPeter Morici, how do you see it?
MORICIIt's a very good graduate student paper. There are a lot of generalizations, assertions that are in the sort of conventional wisdom of liberal academics. For example, borrowing to finance investment is bad, but there's no consideration, for example, with regard to -- what that would mean for the structure of ownership and foreign ownership in American business, and the fact that most small businesses are started by people borrowing against their house. It's things like that.
MORICIA very significant point is the notion that manufacturing should get a preference. The assertions they make are generally conceived to be true about the benefits of manufacturing, but there's no calculation. And we would expect this from an administration, not from an academic, as to what the benefit is that manufacturing in parts, therefore, what preference it should receive.
REHMEdward Kleinbard, what kind of advantage or disadvantage do you see to this kind of proposal?
KLEINBARDWell, I think, strategically, what the president has done is put out what I think of as sort of a business person's term sheet. As the other panelists have said, this is not a detailed proposal, nor is it a blue ribbon panel, 260-page analysis. To me, the real importance is that it's signaling that the president is willing to, in effect, make a deal on corporate tax rates in the mid-20s and is, in that sense, moving towards the possibility, at some point in the future, of significant incremental, not radical but incremental reform of the corporate tax system.
REHMBut I gather you've said you wish he had proposed something a little more radical, such as?
KLEINBARDWell, I have a luxury as an academic of always wanting things to be both pure and more radical. The report identifies some fundamental problems with our business tax system. The issue is not, for example, debt as such. It's that we have radically different tax rates on returns to debt capital and returns to equity investment. And these are just legal labels.
KLEINBARDWe need a tax system that measures returns to investment, the capital income, consistently, regardless of whether the piece of paper you hold is called a debt or equity, and regardless of whether the form of your business organization is a corporation, a proprietorship or a partnership. Right now, we have a hodgepodge of rates depending on these legal formalities.
REHMAnd those legal formalities, Isabel Sawhill, define who pays what in taxes.
SAWHILLWell, I think that one of the things we need to get clear here is the distinction between tax rates and what corporations effectively pay. And it's often said, and it's true, that the United States has a high corporate tax rate. In fact, it has -- with the exception of Japan, which is about to lower their rate -- the highest corporate tax rate in the advanced world, but, because there are so many loopholes and so many preferences in the system, the actual rates that corporations pay are actually quite low.
SAWHILLSo what the administration is doing is saying, let's lower the rate, but let's broaden the base. And I think that's a well regarded set of principles right now for tax reform in general. Everybody is talking about them, whether on the Democratic side or on the Republican side. In terms of the politics of this, I think the president is signaling, first of all, that he's friendly to business. That's a good thing to do if you're trying to win an election. Secondly, he's saying, I'm not a big tax raiser.
SAWHILLYou may think all Democrats raise taxes, but I'm not talking about raising taxes. I'm actually talking about lowering them, at least lowering the rate. And then, finally, he's saying, we do need to reform this system. The corporate tax system -- in fact, the entire tax system -- in the U.S. is a mess, and we're going to need to do a lot more. And this is an opening bid.
REHMIs broadening the base code for closing loopholes, making sure that corporations pay their fair share?
SAWHILLThat's absolutely what it is. Now, in the process of closing some loopholes -- and they weren't terribly specific -- they were kind of vague. I think Siobhan said that as well. But that's the right set of principles, and they are talking about actually adding some new preferences, for example, for manufacturing. And, I think, I agree with the last panelist who said there -- it's not clear why we want to do that. There's some arguments about it, but I think it's debatable.
MORICIWell, to clarify...
MORICI...we do want to do it. The question is how much and justifying it. And that wasn't there. The statements they made about the impact of manufacturing on the economy are essentially true. And manufacturers, broadly -- that's where the trade is. If you look at the trade numbers, that's where international trade is. And our manufacturers, for a variety of reasons, are disadvantaged, vis-à-vis the Chinese, the Japanese and the Germans who rely on evaluated tax more and rebate that on exports.
MORICIAnd this is one way of getting at that. But, you know, if he's going to talk about tightening up the base, then we also have to talk about getting rid of all these special entities that we have, different types of corporations that can circumvent the corporate tax by passing through to dividends. And at the same time, if you just let everybody pass through dividends to stockholders without paying tax on it, you get rid of the bias with regard to interest rates. That's another way of getting at it. If he was trying to make himself appear to be business friendly, my emails did not reflect it yesterday.
REHMIsabel, do you believe that manufacturers are disadvantaged in the current system?
SAWHILLObviously, compared to some other countries and in some sectors, they are. But I think it's very dicey when the federal government gets into picking winners and losers. And it's not totally clear to me that we should give big preferences to manufacturing over services. I think what we should really focus on is the importance of innovation. And there is an R&D tax credit that the administration and most Republicans are in favor of extending or making permanent.
SAWHILLAnd I think that is the place to focus rather than on all of manufacturing. The president tries to make a distinction between hi-tech or advanced manufacturing and regular manufacturing, but I think that gets pretty difficult to do. There's a risk that it'll become a politicized exercise.
REHMIsabel Sawhill, she's senior fellow in Economic Studies at The Brookings Institution. You can join us, 800-433-8850. Send us your email to email@example.com. Join us on Facebook or send us a tweet. Siobhan, are different industries, different companies kind of singled out in this plan, or is it strictly across the board?
HUGHESIt's not strictly across the board. Isabel's point was right, that some industries get special benefits. For example, renewable electricity is one that is really singled out for special benefits. They would get a permanent tax credit for renewable energy production. The losers -- no surprise here -- are oil and gas companies. A lot of their tax deductions would be taken away -- not too happy about that.
HUGHESAnd then manufacturing is actually really interesting because, while Mr. Obama is giving, on the one hand, with some extra deductions, he's taking away, on the other, from the point of view of some big multinationals, by wanting a minimum tax on foreign earnings. And so it's interesting that the group he's trying most to appeal to is really having some trepidation about what this is going to mean for them.
REHMWhat happens to foreign earnings right now? Are they totally exempt from taxation?
HUGHESYou can defer paying taxes on your foreign earnings. You have to pay taxes when you bring those earnings back into this country, and for that reason, a lot of companies are a little reluctant.
MORICIThere's two parts to that. You pay tax in the country that you're in.
MORICIAnd then you...
REHMBut those are -- have much lower rates, are they not?
MORICIWell, we have to look at the effective rates. They're not as much lower as people complain, but they are at lowered rates. And then you pay the difference when you bring the money home. The real question is: Should we be taxing economic activity that takes places in other territories?
REHMAll right. Short break. We'll be right back.
REHMWelcome back. As we talk about the president's proposal to reduce corporate tax rates from 35 to 28 percent, but at the same time to eliminate certain loopholes that corporations and some manufacturers enjoy, here in the studio: Peter Morici -- he's at the University of Maryland -- Isabel Sawhill of the Brookings Institution and Siobhan Hughes, Wall Street Journal reporter, joining us from the University of Southern California, Edward Kleinbard. He is professor of law.
REHMAnd we will open the phones very shortly, 800-433-8850. Edward Kleinbard, to what extent do you agree that any U.S. companies are disadvantaged?
KLEINBARDI agree with the observations that they made to this point that -- or some of the observations that it's extremely difficult for the tax system to make the kind of distinctions that people have in their minds between manufacturing and services industries. Take, for example, the local industry out here, film production. Is that a service business or is that a manufacturing business? When you buy shrink-wrapped software at your local Best Buy, are you buying a manufactured product or you buying a service?
KLEINBARDSo these distinctions, in fact, tend to blur in a modern economy. But I want to come back to where we were just before the break on the topic of international tax and really take issue with what Prof. Morici suggested. He said that the U.S. companies pay tax for where they are, where they do business, and that's just not true.
KLEINBARDThere is a huge amount of data that demonstrates that, in fact, U.S. companies, the most sophisticated of them, are extremely skilled at moving their tax liability from the jurisdictions where they're actually doing business to places like Bermuda, the Cayman Islands and Ireland. And the net result is that the effective tax rates on the international operations of U.S. companies, for all of them, from the most sophisticated to the least sophisticated, is in the neighborhood of 16.5 percent.
KLEINBARDSo it is not the case that U.S. companies are paying tax in the jurisdictions where they're doing business.
REHMAll right. Let me follow up with you on that, Ed. How much does the plan offered by the president change that?
KLEINBARDWell, what the president proposes to deal with this problem of what I call stateless income, that is, income that -- you know, like a stateless person that has no home, this is income that, for tax purposes, has no home, and firms just book the income in the most advantageous place. The president addresses this through a minimum tax, and several of the other panelists have already observed that this is -- this document is a little skinny on details.
KLEINBARDAnd, in particular, it doesn't get any details as to how this minimum tax would work or, most important, what the rate would be. But that is -- that, along with the interest deduction or limitations seem to be the tools that the president is proposing to deal with this issue.
REHMAnd one last question on that, before I turn to Peter Morici for his comments, no matter what law is adopted regarding tax reform, aren't the same corporations and manufacturers going to be able to hire the same clever lawyers and professionals to go around those laws?
KLEINBARDWell, you know, that's why I changed professions a few years ago. I worked for 30 years as one of those clever lawyers working for some of America's largest companies. That's why I left and went to government, and that's why I went into academia because I want to do what I can to help the tax system develop robust rules, rules that are robust to that kind of gaming. And the way you do that is by having rules that are relatively simple and comprehensive in their application and that point in the right direction.
KLEINBARDI'm a little -- I'm concerned that the minimum tax proposal is going to end up being too complicated and thereby offer opportunities for clever lawyering.
REHMAll right. Peter Morici.
MORICIIt is true that companies move tax burdens around to find the lowest rate. They're very adroit at that. I acknowledge that. My point was, is they pay on the net. It isn't like no taxes are paid when they go abroad and the entire tax is levied here. With regard to classifying entities, the Commerce Department does that very effectively. You know, we know what -- we know who are the manufacturers in the United States, and they would be classified as manufacturers. Wal-Mart is not. Wal-Mart is a service enterprise.
MORICIIt's doesn't -- it sells you software. And it's value at it consists primarily of moving the package from one place to another, putting it in your hand. They're running it through a cash register. So, I mean, manufacturing is a well-defined class of businesses in the United States. There's some fudging, but that's not the biggest problem. The biggest problem is: What are the benefits that manufacturers impart? Are they truly disadvantaged?
MORICIMany people on both sides of the aisle believe they are because of the enormous benefits stemming from the value that our major competitors place on that activity. And as a consequence, you know, what is the impact on the U.S. economy? Is it negative? Do we have to compensate? That's the argument in the paper.
REHMAll right. Isabel, let me turn to you. In what ways does this battle over corporate tax rates play into the battle we're going to have over personal tax rates? People really want to know: How is this going to affect me personally?
SAWHILLWell, as I said earlier, corporate taxes are a small proportion of total revenues, I think, about 10 percent at the federal level. The biggest taxes we levy on people are payroll taxes and then income taxes, personal income taxes. And, I think, what you're going to see, sometime soon -- and you're seeing a lot of debate about it already -- is an attempt to reform the entire system. And, in fact, it makes a lot of sense to not do this piecemeal because what you do on one side of the ledger may have implications for what you do on the other side of the ledger.
REHMBut, of course, nothing is likely to be done this year.
SAWHILLNothing is likely to be done this year, but we will have a huge battle after the election in the so-called lame duck Congress. Some people are calling this taxmageddon because there will have to be a decision about whether to extend the expiring Bush tax cuts. There will have to be a decision about what to do about the payroll tax cuts that's currently in place. There will have to be a decision about what to do about whether to deeply cut both domestic and defense spending as required by the deal over the -- after the super committee failed.
SAWHILLAnd for these -- and there will be a possible debt ceiling crisis again, so it's going to be a very interesting time. And we are going to have to do some short-term things at that point, which may affect whether we could get comprehensive reform done in 2013.
REHMSiobhan, what about Mitt Romney's approach to this whole corporate tax issue? How is his similar to or different from the president's tax plan?
HUGHESThat piece of it, some of that, I'm a little skimpy on. The thing I will note is that an issue for him -- and we haven't discussed this -- is Mr. Obama has proposed taxing carried interest at the ordinary rate. That's a mouthful.
REHMExplain what that means.
HUGHESWhat that means is that people at private equity companies, hedge fund managers, they currently are able to pay a 15 percent tax rate on their income. And Mr. Obama is saying, hey, wait a second, that's way too low.
REHMBecause that's seen as dividends rather than pure income?
HUGHESIt's treated differently because, even though it's a form of compensating for them for their labor, the way it flows through to them is different from ordinary wages.
REHMYou know, it's fascinating to me that many companies, corporations, even medical practices, have changed their structure so that income passes through personally rather than gets taxed at a corporate income rate bill.
SAWHILLWell, I think the larger issue here is sort of double taxation. Do you want a tax once at the corporate level and then again to the people who get dividends or whatever? And that's been an argument for keeping the rate on dividends, for example, as well as capital gains, low, currently 15 percent. Now, the administration has talked about raising the capital gains rate to 20 percent and raising the rate on dividends back to ordinary rates, meaning that 35 percent would be the top rate right now. So that would be a huge change.
SAWHILLAnd I could argue it either way, but I do think that most of the people who get dividends -- not everybody but disproportionately -- are quite wealthy and that, therefore, raising taxes on income from investments is from a standpoint of shared sacrifice and fairness -- not a bad idea.
REHMEdward Kleinbard, to what extent do you think that the president's plan regarding corporate tax cuts, closing loopholes, would promote overall economic growth, or do you know enough about it yet?
KLEINBARDWell, I agree with the observations that have been made by, I think, all of my fellow panelists here, that we don't have enough details to do that level of economic analysis. As a general matter, I am a strong believer that the tax system should be relatively simple and comprehensive so that it's not front and center in business people's minds when they're engaging in business planning. And you've just identified, you know, several of the problems that we have in the current code with some firms are -- even large companies are passed through so that there's no corporate tax.
KLEINBARDOthers are subject to double tax. The point about capital gains tax -- you know, is that a double tax? Well, again, the capital gains tax is a double tax when it's applied to sales of stock of a corporation. It's not at all a double tax when it's applied to carried interest or to the sale of your ownership in a partnership. So we have a real hodgepodge. And this is a positive incremental step towards reducing the number of anomalies in the tax code and getting us somewhat closer to a, more or less, constant rate on different forms of capital income on returns from investment. So that's a positive step.
REHMEdward Kleinbard, professor of law at the University of Southern California Gould School of Law, and you're listening to "The Diane Rehm Show." We have many callers. I'm going to open the phones now, 800-433-8850. To Raleigh, N.C. Good morning, Mark. You're on the air.
MARKI have a public choice argument, and that is, doesn't matter what you do to the rate base now. You're still going to have special interests that distort it in the future. Any response to that?
MORICIYeah. We had the Reagan tax reforms regarding personal income tax. And as soon as we got a change in political party in the White House, we started getting different rates, new deductions and things like that. And even this proposal, I'm very disappointed in that the president wants to get rid of the special deduction for oil and gas, but he wants to create a special deduction for solar energy. The man has repeatedly expressed those predilections over and over again, but he's never really articulated for us how much of a preference alternative energy really warrants.
MORICIHe has never really laid out, you know, what the potential benefits are and how much money it's going to take to put it over the top and when we can expect to really see results. He's asking the American people to invest socially (unintelligible) saying the social rate of return is greater than the private rate of return, but he provides no estimates. Once again, it's just a generalization.
MORICISo my feeling is he's basically kicked to Congress the task of reforming the tax code, saying, here are some general goals, like he did with stimulus and as he did with health care and leaving it to Congress to write it in. In that environment, we're going to get exactly what you described.
SAWHILLWell, there is a problem with special interests having disproportionate influence on the tax system. And I agree with Peter that, in 1986, when we did a big tax reform and broadened the base, lower rates and simplified things, that, after that -- and both kinds of administration, both Democratic and Republican -- the special interests began to weigh in again and to make things more complex. On the public interest front, there are arguments for giving preferences, for example, to clean energy because it has environmental benefits.
SAWHILLIt may -- getting less dependent on other sources of energy may be in our national security interest, so I do think there is a public interest, as well as a lot of special interest, that get into the tax code.
REHMDo you disagree with that, Peter?
MORICIThis goes back to what I said about manufacturing. We know -- I mean, there's an enormous body of evidence that would indicate that manufacturing is more valuable than, say, a dry cleaner to the economy. But what should that preference be? The president has at his disposal what the graduate student writing a term paper does not have, and that is the Office of Management and Budget. And the Congress has CBO to crank the numbers, to start to hone in on what the real perspective benefit would be -- is for manufacturing or would be from solar and wind.
MORICIAt this point in this administration, four years in, it's high time he stopped talking about -- he stop talking in generalizations, but rather start putting some specifics on what he wants and laying out exactly what the numbers would look like. Also, with the interest at -- the issue of interest deductions, how much of a rate does he want? How much revenue would that bring in? Things like that were absent.
SAWHILLWell, we don't have the details. That's correct. But I think that he started the conversation, and it's up to Congress to consider this now. There are hearings going on. Both Max Baucus, chairman of the Senate Finance Committee and a Democrat, and Dave Camp, chair of the Ways and Means Committee and a Republican, are working together on this.
REHMIsabel Sawhill. She is senior fellow in Economic Studies at The Brookings Institution. Short break here, and when we come back, more of your calls. Stay with us.
REHMAnd welcome back. We'll go right back to the phones as we talk about not only corporate but personal tax rates. Let's go to Houston, Texas. Good morning, David. You're on the air.
DAVIDThank you very much. Enjoy your program always.
DAVIDI am a little bit troubled by the fact that there's a lot of discussion so far this morning about the fact that Congress isn't going to do anything, particularly the Senate, but yet Obama has started the discussion. What discussion? He's sending it to (unintelligible) food fight. At this point, I think your discussion this morning is a bit disingenuous because you don't talk about the fact that this is not anything except a fairly cynical campaign position on his part.
REHMHow do you see it? Do you see it as a cynical campaign position, Siobhan?
HUGHESThere's a serious aspect to this in that, across the spectrum -- and I think Isabel mentioned this -- people really do want to do something on corporate tax reform. As the caller said, there is a political aspect to this, too. Everyone thinks that this is not going to get done before the election. And Mr. Obama is going to be able to say, I have this tax plan. Congress hasn't act yet. And it's going to help him run against the do-nothing Congress. For their part, Republicans are going to be able to say Mr. Obama is not a leader. He didn't provide any details. And they'll run at him that way.
REHMEdward Kleinbard, how do you see it politically?
KLEINBARDWell, it turns out that the president of the United States is a politician. I mean, who knew? So, of course, there's a political component to anything that this president or any other president since George Washington has done. But I actually am a little bit more optimistic -- and that's not in my personality -- than, perhaps, the caller is. And the reason is that we have, for the first time, the president, on the record, as essentially within a hair's breadth of Chairman Camp of the House Ways and Means Committee on tax rates and with Gov. Romney on tax rates for corporations.
KLEINBARDSo we are, in fact, beginning a dance where issues will be sorted out. The big conceptual sticking point on the corporate side is international. But it turns out, if you work through the details, the difference between the actual tax results from, say, Chairman Camp's international proposal and the president's international proposals are not as large in practice as one might think.
KLEINBARDOn the personal side, that's where we have a complete disagreement, complete disagreement on the personal side. But it is possible to imagine incremental corporate tax reform happening if the president is re-elected in 2013.
KLEINBARDAnd the work to do that is this is, in fact, the way Washington works, and people inch towards a compromise.
REHMAnd inch very slowly at that.
REHMHere's an email from Tim in Cleveland, Ohio, who says, "The foreign tax credit is a huge giveaway to corporations created for a whole other purpose. Today, corporations can get foreign governments, like China, to charge them a tax which is used to build infrastructure that the company needs. This tax is then deducted right off the corporations' U.S. tax bill. All they have to do is get the foreign government to call it a tax. This is not a tax deduction. It's a full tax credit." How do you see it, Peter?
MORICIOh, I wouldn't be surprised that that's going on, and that's a problem that we need to address.
MORICIWell, I don't know if it's as big as the caller makes out. Certainly, it's a problem in China, but I don't know how much -- I think if you look at the big pie chart -- I don't know how much of a slice it is -- it's something that needs to be addressed. I would suggest to you that there are much more contentious issues than that in any effort to reform taxes. And I don't know that we can dictate to China how to run their tax structure and how to label fees.
SAWHILLWell, I don't think that I have any particular expertise to add here. I would say, in terms of the former caller who thought that all of this was politics, I couldn't have agreed more with Edward when he said, of course, this is partly politics. But that's to be expected if you're president of the United States.
REHMAll right. To...
KLEINBARDDiane, can I...
KLEINBARDI apologize, but, you know, this is -- actually, this question that you just got is a very interesting one, but it's one that has an answer. And it's been in the tax law for decades. We have some very specific rules for so-called dual-capacity taxpayers, under which taxes that are levied by a foreign country, that convey a benefit to the taxpayer, are kicked out of the foreign tax credit system.
KLEINBARDSo this is just a perfect example where, if you want to talk about international tax policy in particular, you got to roll up your sleeves and get into the details. And, you know, we have these dual-capacity regulations to address this issue and have had for decades.
REHMAll right. To Paula, who's in Toledo, Ohio, good morning.
PAULAHello. Thank you for taking my call.
PAULAI've been listening to this with great interest. I am technically a corporation. I'm operating a C Corp that employs a total of five people in the middle of a -- part of the country that's really struggling economically. And we are incorporated effectively for liability purposes. The corporation, as such, had practically no profit because all of our revenues that we can accrue over the year go to pay wages, and that's how our earnings are disbursed.
PAULASo when I hear about a minimum corporate tax based on net revenues, I'm completely freaked out. A lot of Americans don't realize that corporations are small people like us, as well as Wal-Mart and IBM and the likes of international people. I can't afford the kind of tax lawyers to shelter my revenues, and I'm wondering what kind of implications there will be for organizations like mine in the proposed legislation.
KLEINBARDYou know, this is a really good question, but it has a technical answer, which is that the minimum tax that the president is talking about is only in respect to the foreign operations of U.S. companies. So if the caller has no international operations, the corporate minimum tax is not relevant. And, in addition, the minimum tax would apply to the net profits. So if you have a C corporation that's paying out most of its revenues in deductible wages, it has no net profits, and, for that reason as well, the minimum tax would not apply.
SAWHILLI think at a more philosophical level, the caller's point is well-taken, that, because of the complexity of the tax code, if you're a small business or if you're an individual for that matter, these complexities make you very anxious. You say to yourself, well, everybody else is getting these subsidies or special benefits or preferences, and I'm not. And it's not fair. And that's one of the reasons I think we need to simplify both the corporate and the personal taxes.
MORICIYour basic problem that was highlighted in the paper that I was --- and this is where there was some hard data -- was just the proliferation of entities that get themselves qualified in one way or another to get preferential rates in terms of being some kind of small entity. And I think that is very profound and something we need to address. It's one thing to say that small businesses need a lower rate. It's another thing to let everybody identify themselves as a small business.
MORICINow, not everyone is doing it, but a lot of people are managing how. You know, is a law firm with offices in six major cities and 2,000 partners a small business? I don't think so. But it can find a way to make itself one pretty easily. I think the attorney in California would verify that.
REHMAll right. Let's go now to Royal Oak, Mich. Good morning, Samet. (sp?) You're on the air.
SAMETHi. I just wanted to comment on what one of the panelist said earlier about the lower tax rate for manufacturing. I feel that manufacturing is a matter of national security. The manufacturing base we have in this country now, compared to before World War II, is a lot less. And, you know, if, you know, heaven forbid, a sneak attack would happen, you know, wipe out a good chunk of our military power, to be able to rebuild that quickly does not exist anymore.
SAMETWe'd have to build the roads to brand-new sites to build factories to do it. We don't even have factories that we -- as many factories that we could just convert over. And so, I think, for national security reason, we should be trying to have as much manufacturing in the United States that would allow us to be able to meet those demands.
REHMAnybody want to comment, Siobhan?
HUGHESWell, I know that when the administration came out with its proposal, it put manufacturing in a special category because of what it called spillover effects, saying that the benefits to society, in a way much like clean energy, are broader than the benefits that just go to the corporation. And, specifically, so much innovation, the point was, comes out of manufacturing, it makes sense to give it a little bit of a boost.
MORICIYou know, you can make the same argue for oil and gas development, and I, by the way, have no connections to the industry. But importing oil imposes certain security problems. Producing it domestically ameliorates that. You could make the same argument that, because of the cost of protecting the Persian Gulf, we want to boost domestic oil production. It's the same argument that you -- you can see how you can make these arguments in a lot of different ways, and that's exactly going to happen when this thing gets booted to the capital because of the way its' been written up.
MORICIThis is really an incomplete document. It's very much a campaign document, but I wouldn't say that it's cynical. I mean, this is a Democrat running for president. And he's saying, everybody's talking about lower tax rates and tax reforms. Well, this is what I stand for. I don't see anything wrong with a president doing that.
REHMPeter, do you see any of the Republican candidates coming out with anything perhaps more concrete that people can really get their teeth into?
MORICIAbsolutely not. I mean, the most concrete economic proposal was Mitt Romney's, which is a couple of hundred pages, catches everything, not just corporate taxes. It's really not possible for a candidate to be that specific. The president of the United States has enormous analytical resources at his disposal. When I served, you know, during the Clinton years at the ITC, I had 50 economists that did nothing but worry about international economics and trade.
MORICIWe could generate all manner of information and data for the U.S. Trade Representative's Office and the White House within a matter of days. What disappoints me here is he hasn't used that infrastructure, and this has happened over and over again.
REHMEdward, a lot of people are comparing this to the president's health care plan, that he left it wide open for the Congress to take care of. Is that how you see it?
KLEINBARDNo, it really isn't. I have the same disappointment that many others did that the president didn't lay out a more concrete blueprint on health care reform. But what I see here is a -- you know, a document that is an opening bid. As I said, if you imagine this as just another business deal, this is a business person's term sheet, not the final contract. And he's saying we're going to have the following points.
KLEINBARDHe has the resources available to him that Peter Morici has identified, and he will use them when it's time to sit down and negotiate. I don't believe for a minute that when we come to actual incremental corporate tax reform that the Treasury Department will be absent, that the Office of Tax Policy will be absent. I think, the contrary, they will be charged with and will produce detailed proposed legislative language, their own revenue estimates, which are not official, but they'll do them and abundant analytics to support it. So this is a business person's term sheet, not the final contract.
REHMMm hmm. And you're listening to the "The Diane Rehm Show." Where, in your view, Isabel, does this plan go from here?
SAWHILLWell, I think that, as we've already said, we're not going to see much action this year. The Congress is unable to agree even on much less controversial and much smaller items than this, so they're certainly not going to come to an agreement on corporate taxation, in my view. I think we have a hope on the part of both parties that voters are going to give them a mandate to do what they want to do. And if Republicans are elected, I have no doubt that you will see lower corporate tax rates.
SAWHILLYou will probably see a plan that is, at best, revenue neutral and probably loses revenues, in other words, probably increases debt and deficits. I think if Obama is re-elected, you will also see lower corporate rates and some broadening of the base but that it will be much more revenue positive. In other words, the administration, although it will be hard, will want to get some net revenues to apply to deficit reduction out of tax reform.
REHMPeter, where do you see it going?
MORICII don't see it going very far. Richard Nixon made a very powerful observation. When the idea of a six-year one term, he says, no. He says, presidents do a lot their first term 'cause they want to get re-elected. He says, if you look at second terms, not a lot gets done. My feeling is we're going to get tax reform, but we're going to get it when we get a new president. And that is not to say I am advocating that we all run out and vote for a Republican to get tax reform. But I think this is going to wait until there's a new administration.
MORICIAlready, this administration is getting tired. This document is a tired document. This document -- he could have written this two years ago with the level of generalization that's present in this document.
HUGHESTo put a slightly different tilt on it, one reason you could argue that so much was left out is that this is, as Mr. Kleinbard said, an opening bid. And one of the ways you negotiate most effectively is by not putting all of your demands upfront, but by leaving a little bit of room to negotiate. So nothing is going to happen before the elections, but it's probably premature to totally write this off.
REHMAnd where does it go if President Obama is re-elected? What happens then?
HUGHESThat's an open question for me. One of the things that I'm really interested in is what type of deals got made. When we were talking to senior treasury officials yesterday, people said, how do you feel about repatriation, essentially, letting companies bring back those foreign earnings? And they said, well, we are opposed to it as a standalone bill. But you got the sense that might be one of the bargaining chips on the table as part of a bigger deal.
REHMInteresting. Well, lots more to be said. We'll watch. Siobhan Hughes, a reporter for The Wall Street Journal, Isabel Sawhill of the Brookings Institution, Peter Morici of the University of Maryland, Edward Kleinbard, University of Southern California School of Law, thank you all so much.
REHMAnd thanks for listening, all. I'm Diane Rehm.
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