The Pros and Cons of Obama’s Corporate Tax Plan

Obama wants U.S. companies to pay a 145 tax on the approximately $2 trillion of overseas earnings they have accumulated, The Wall Street Journal reported. They would face a 19% minimum tax on future foreign profits, but companies could reinvest those funds in the U.S. without paying additional tax.

Politically, there’s some attraction in this idea for both sides for at least 3 reasons.

1. It addresses the undeniable impulse in high U.S. corporate tax rates that keeps compelling CEOs of American companies to try “tax-inversion” maneuvers by buying foreign companies and domiciling there so they can be taxed at rates that are lower in most other countries.

2. It would tackle the problem of America’s allegedly crumbling roads and bridges, which has been said to have the potential for crippling the nation’s future economy. Plus there are financial incentives politicians can offer construction companies who get involved in a government-sponsored road-and-bridge-repairing campaign.

3. Both Democrats and Republicans believe that Americans want them to come together around a common cause to prove that Washington can “govern” again. This might be the change agent.

But many obstacles remain before any such deal is reached, including vast differences in how this idea is perceived. Here are 3 popular but mostly conflicting views:

1. It could prove a brilliant re-set of current thinking. The proposed reforms “could foster a change in corporate thinking,” opined The New York Times’ Upshot. “Companies would make their financing and investing decisions with more of an eye to pretax profits rather than tax planning. American companies tie themselves in knots to avoid bringing foreign profits home … A revised system would focus investing decisions toward the highest returns, while preventing companies from taking advantage of tax havens, even if it would sometimes lead American companies to “ship jobs overseas.”

2. It could be a poison pill. Some warn that any such agreement could create only a temporary fix and even something of a poison pill. It “would do little to change the long-term incentives to keep profits abroad,” the Journal editorialized, “or help U.S. tax competitiveness. The revenue windfall would be better used to support a larger corporate tax reform that permanently lowers rates. ”

3. It could be overwhelmed by political polarization. Some pundits are calling, for example, for a strong partisan response to Obama’s idea. “Refusing to bite on Mr. Obama’s carrots would be a good way for Republicans to re-establish credibility with American voters,” Daniel Henninger wrote in the Journal. “The most lasting contribution of the conservative insurgency out in the country may be that it blew the whistle on Washington’s bipartisan crony capitalism. Republicans should use infrastructure to join the whistleblowers … ‘Infrastructure’ is code for the campaign contributions that flow back to the politicians only after they spend someone’s taxes on cement bicycle paths and bullet trains.”

One thing is for sure: Unlike many other issues during which President Obama and American CEOs were decidedly opposed in principle and often in politics, resolving the corporate-tax dilemma uncommonly holds out the possibility of creating a win-win scenario.