A few weeks before the American people thoroughly rejected him and his party at the polls in 2010, President Obama sat down with the New York Times’ Peter Baker and talked about “what went wrong” during his first two years in office.
Obama admitted that the seemingly never ending parade of new spending programs he pushed at the beginning of his presidency might have made him look too much like “the same old tax-and-spend liberal Democrat” Americans have known for years.
A little over a year later, Obama’s State of the Union showed that he had taken that lesson to heart. Gone was any talk of huge new stimulus programs, infrastructure spending, or an expanded welfare state. He barely mentioned his trillion-dollar Obamacare health care law at all.
Instead, the first policy area Obama hit was taxes. But, while he did make the case for some tax increases later in the speech, he started off by talking about all the wonderful new tax benefits he would dispense: tax breaks for manufacturers, even bigger breaks for “high-tech” manufacturers, tax credits for education, tax relief for small businesses, more credits for “clean energy” companies, etc.
The lesson Obama learned from 2010 was not to stop spending. As a Democrat, he can’t do that. Increasing federal spending is like breathing to him. Instead, Obama has learned that if he is going to spend money, the best way to do it is through the tax code. That way most Americans won’t notice it as quickly or clearly.
But picking winners and losers through the tax code is a terrible drain on our economy. Just ask Obama’s own Treasury Department whose new corporate tax plan states, “Currently, tax expenditures in the tax code vary dramatically by industry. ... The result is a tax system that distorts investment decisions. By allocating capital inefficiently, this system lowers living standards now and could impede technological innovation.”
Unfortunately, the actual policy in Obama’s corporate tax plan only makes this problem worse. The plan does remove some loopholes, but mostly just on industries Obama hates anyway (like the oil and gas industry, jet manufacturers and insurance companies).
But for every loophole Obama closes, he creates another. Manufacturers, clean energy firms and firms that do not do business overseas are all big winners under Obama’s plan.
Picking winners and losers through the tax code not only leads to inefficient allocations of resources, but it also necessitates an overwhelming complex system that hurts the entire economy.
As recently as 2008, the World Bank ranked the United States the fourth easiest country in the world to start a new business in. Today, the World Bank ranks the U.S. 17th. The biggest reason for the bad ranking? A complicated tax system that ranks 72nd in ease of compliance.
And then there is the cost. According to the Congressional Budget Office, the federal government will spend more than $800 billion on tax benefits in 2012 alone. That is 5.3 percent of the annual gross domestic product, which is greater than projected spending on Social Security, Medicare and Medicaid combined.
The Democrats’ new game plan is simple. First, keep the U.S. corporate income tax rate among the highest in the world and raise individual income taxes on other firms that choose not to incorporate.
Second, dole out benefits to political allies, friendly industries and key constituencies through the tax code. Democrats used to tax and spend. Now they tax and loophole.
How should conservatives respond? They should follow President Reagan’s model. His 1986 Tax Reform Act eliminated hundreds of loopholes, cut the number of tax brackets from 15 to two, and slashed the top income tax rate from 50 percent to 28 percent. Government revenues soared as the economy subsequently grew.
Too bad Obama has opted to go in the opposite direction.
Conn Carroll is a senior editorial writer for The Washington Examiner. He can be reached at email@example.com.