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Why Obama is proposing whopping corporate tax cuts, and why he’s wrong

Robert Reich, professor of public policy | September 8, 2010

President Obama reportedly will propose two big corporate tax cuts this week.

One would expand and make permanent the research and experimentation tax credit, at a cost of about $100 billion over the next ten years. The other would allow companies to write off 100 percent of their new investments in plant and equipment between now and the end of 2011 at a cost next year of substantially more than $100 billion (but a ten-year cost of about $30 billion since those write-offs wouldn’t be taken over the longer-term).

The economy needs two whopping corporate tax cuts right now as much as someone with a serious heart condition needs Botox.

The reason businesses aren’t investing in new plant and equipment has nothing to do with the cost of capital. It’s because they don’t need the additional capacity. There isn’t enough demand for their goods and services to justify it. Consumers aren’t buying because they’re trying to come out from under a huge debt load, including mortgage debt; they have to start saving because their nest eggs are worth substantially less; and they’ve lost or are worried about losing jobs and pay.

In any event, small businesses don’t have enough profits against which to use these tax credits and deductions, and large corporations are sitting on over a trillion dollars of profits and don’t need them.

Republicans and corporate lobbyists have been demanding tax cuts on corporate investments for one reason: Big corporations are investing in automated equipment, robotics, numerically-controlled machine tools, and software. These investments are designed to boost profits by permanently replacing workers and cutting payrolls. The tax breaks Obama is proposing would make such investments all the more profitable.

In sum, Obama’s proposed corporate tax cuts (1) won’t generate more jobs because they don’t put any cash in worker’s pockets (as would, for example, exempting the first $20,000 of income from the payroll tax and making up the difference by applying the payroll tax to incomes over $250,000); (2) will subsidize companies to cut even more jobs; and (3) will cost $130 billion — money that could better be spent helping states and locales avoid laying off thousands of teachers, fire fighters, and police.

So why is Obama proposing them? To put Republicans in a bind. If they refuse to go along he can justifiably say they have no agenda other than obstruction. After all, the only thing they’ve been arguing for is lower taxes. On the other hand, if Republicans agree to support these corporate tax cuts, Obama can claim a legislative victory that will help Democrats neutralize their opponents in the upcoming elections.

The proposals also make it harder for Republicans to argue the Bush income tax cuts should be extended for the richest 3 percent of taxpayers because small businesses need it. Obama’s corporate tax cuts would appear to do the trick.

The White House probably figures even if Republicans agree to the proposed tax cuts, nothing will come of it. Congress will be in session for only about two weeks between now and the midterm elections so it’s doubtful these proposals would be enacted in any event.

But this cynical exercise could backfire if Republicans call Obama’s bluff and demand the corporate tax cuts be put on a fast track and get signed into legislation before the midterms.

More troubling, Obama’s whopping proposed corporate tax cuts help legitimize the supply-side dogma that the economy’s biggest obstacle to growth is the cost of capital, rather than the plight of ordinary working people.

Cross-posted from Robert Reich’s blog.

Comments to “Why Obama is proposing whopping corporate tax cuts, and why he’s wrong

  1. Jo:
    Much of what you say has validity but the whooping tax cuts to corporations to capitalize R&D robotics,numerical control machines do not employ union workers like you purport are reaping huge monetary gains from Obama’s vast stimulus package.Call any union hall electricians,laborers,plumbers&steam fitters,boiler makers,you will find more than 90% on the out of work list no apprentices are working at all,if that is living high on the hog you may not have done your home work.And some of your sinerios of conspiracy I find to be science fiction.

  2. Obama promised a change from Bush’s measly 4.7% average unemployment to hope and change. These stimulus costs of the Obama regime are more than the 9-year Afgh. Iraqi wars had cost. The Americans had wondered where all this money went too, most believe it went to Wall Street and to Unions. Most Unions live better lives than private small business citizens ( Republican side of the U.S. economy). So as too pay-off for the election, Obama gave stimulus to these already thriving Union sectors of the Economy. I know southern cal union employees that have three stock funny cars paid for by their wealthy state-funded jobs; and that they can take 63 days off before getting a notice that if they do not return to work, they will be fired. They live in a utopian rich style.

    So I do not see what the complaining is about? Obama is in full control of the economy and certainly helped by Cal’s Christine Romer. Unless the Republicans are holding a gun to Obama’s head ( which they are not!), his decisions are his — and they reflect the Democratic Platform. Unfortunately, Obama’s new stimulus package to Wall Street, the $50 billion dollar mortgages buy-out, which guarantees 90% of forclosures to wall street fat-cats, is all Obama’s choosing. Did Romer recommend it?

    The Democrats and Republicans in Anthropology and Sociology: Lotta Stern ( former student of Cal), 10 October 2004, study illustrates the Cal party registration at 99:1. It is understandable that any faculty will always blame the Republicans. However, I believe this 99:1 is more widespread across America’s Tier Is, and will likely lead to America’s downfall. The jobs we lost we will not get back. The Republicans are turning more leftists to compete, and the Tea Party is too small and unorganized. The Tea Party espouses the founding principles of hard work, and U.S. Jobs. So the eventual outcome is a ethnic race takover like Athens ( Ancient Greece) had succumbed too, but this time the Latinos will in about three decades take over the U.S.A. in all aspects, but it will not correct the Freedom and creativity of the former U.S.A.

    The society will become a second world country and then to a third world country, and then get taken-over by some other country and ended. The Mexicans may use the U.S. military to conquer or carve up some of the world for their new civilizations. This is because the Latinos come from leftist roots from their countries and do not understand well the ideas of the Constitution and the ways of the production by individual freedom and inventiveness. Their countries are in shambles, so they are models of the future U.S of A. For example, The Mexican society has the most billionaires of any country on earth, and it also has the majority of the people in abject poverty. That is their model –money! And they will bring that model to the U.S.A. So the question remains, where do the Europeans move too? Back to Europe? Because their future is no longer in the U.S. States. Everyone is extremely unhappy with this economy. Keep blaming the republicans, they will never work with the leftist Democrats because they cannot take the emotional abuse — and it is abuse at its very core. Any thing they try , they are accused of being a NAZI. A civilized society cannot work under these pretenses. America is over. period. Obama claimed many times on the campaign trail, Republicans are failures. Not like Bill Clinton who said their ‘ policies’ are failures, but Obama ment the human beings. The Republicans would rather see the U.S.A. go down in flames than take that abuse. Tally that up to Human Nature.

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