President Barack Obama drives a hard bargain when negotiating with the business community.
Obama laid out a plan -- what he touted as a “grand bargain” compromise -- Tuesday afternoon that includes what he presented as a swap: lower topline corporate tax rates for Republicans and investment in infrastructure improvements in the U.S. to generate middle-class jobs for Democrats.
“If folks in Washington want a ‘grand bargain,’ how about a grand bargain for middle-class jobs?” Obama asked in a speech delivered from Amazon’s shipping facility in Chattanooga, Tenn., which is 28 football-fields large. “I’m willing to work with Republicans on reforming our corporate tax code, as long as we use the money from transitioning to a simpler tax system for a significant investment in creating middle-class jobs. That’s the deal.”
Many in the business community are less than impressed. Again. This is the second time the Obama administration has proposed roughly the same bargain. A bit over a year ago, then Treasury Secretary Timothy Geithner outlined a framework with many of the same proposals that Obama outlined today. It didn’t fly last year, and it’s not likely to fly this year, either.
Under the newly proposed deal, the maximum corporate tax rate would be decreased to 28 percent from 35 percent. The top rate on U.S. manufacturers would decrease to 25 percent. Meanwhile, to keep the reforms deficit-neutral, meaning that they would pay for themselves, Obama’s deal includes a tax on profits that U.S. companies hold overseas.
“When it comes to the corporate tax code, there are two major changes that will stimulate investment and lead to greater economic growth," says Scott Hodge, president of the Washington, D.C.-based research group the Tax Foundation, in a statement. "One, as the President has acknowledged, is cutting the corporate rate. The other, which he seems dead set against, is to follow the lead of our major trading partners and only tax corporate profits that are earned in this country.”
Furthermore, the vast majority of businesses pay their business taxes on the individual taxpayer rates because they are sole proprietorships, S-Corps, LLCs and partnerships, says Raymond Keating, chief economist for the Small Business and Entrepreneurship Council in Vienna, Va. That means most business owners are not affected by the corporate tax rate. To really supercharge business growth, the individual and business tax rates would need to be lowered, says Keating. “Ideally what you want to do is comprehensive reform where you do both the corporate and the personal and bring rates down on both ends,” says Keating. “There are some real problems when you just deal with one side of the tax equation.”
The International Franchise Association, the industry group that advocates for franchise businesses in the U.S. also voiced criticism of the proposal, saying that a one-sided approach to tax reform misses the boat. “While we agree that renewing America’s global competitiveness and empowering job creation is critical for economic growth, we maintain that tax reform must include both the corporate and individual sides of the tax code,” says Steve Caldeira, president of the IFA, in a statement. “Only fixing the corporate side is not true tax reform.”
Another sticking point for the business community is Obama’s assertion that his plan is “revenue-neutral over the long-term.” In order to update and improve the infrastructure, thereby creating the middle-class jobs Obama is looking for, there will have to be an increase in tax revenue in the near-term. That, says Keating, is going to slow down economic recovery. “From my perspective as an economist, we have seen that it hasn’t worked, unfortunately, over the last several years,” says Keating. “What you need to do is leave those resources in the private sector.”
Given some of the larger, fundamental conflicts in the plan, it is going to be “an uphill battle” for the bargain to make it through Congress, says Keating. Still, it’s good that the discussion of tax reform is broached, he says. Here are a handful of other components to the proposal that stand to impact small-business owners and entrepreneurs.
*Obama’s plan would increase the minimum wage. The White House has repeatedly called for increasing the minimum wage, a move which would increase labor costs for many small businesses. The plan did not specify what the minimum wage would be raised to, but said it would be equivalent to what it was in 1981, once indexed for inflation.
*The bargain would increase business expenses to $1 million. This would be an immediate and significant benefit to small businesses looking to make investments in their business. In 2013, businesses can write off capital expenditures on their taxes up to $500,000 under the Section 179 deduction, Keating says. That deduction is set to drop to $25,000 in 2014. The write-off levels are constantly changing, making it hard for business owners to plan, says Keating. Having the expense limit permanently set to $1 million would stimulate business spending.
*Obama’s plan would invest in manufacturing innovation centers. In his most recent State of the Union address, the President touted the benefits of the 3D printing innovation hub in Youngstown, Ohio. He has since called to launch 15 innovation institutes and with the bargain unveiled today, Obama says he would triple that number to 45 throughout the U.S.