President Obama first targeted wealthy individuals to reduce inequality. Now he’s going after multinational corporations to boost spending as well.
The president’s 2015 budget changes the way that corporate profits are taxed overseas to fund short-term infrastructure spending and make it harder for corporations to avoid being taxed altogether.
Obama’s $4 trillion budget, released on Monday, would raise $238 billion for infrastructure spending by making U.S. corporations pay a one-time, 14% tax on earnings they already have parked overseas. Currently, U.S. corporations only have to pay taxes on earnings when they bring the money back home, at which point they’re taxed at the full 35% corporate rate. That has led many corporations to stockpile cash overseas to avoid being taxed, sometimes delaying repatriation indefinitely.
Under Obama’s plan, future corporate earnings overseas would face a minimum tax of 19%, which corporations could then bring back to the U.S. without being taxed further.
The budget proposes a total of $478 billion in infrastructure spending over the next six years, which would be nearly 40% above the current level, according to Jeff Zients, director of Obama’s National Economic Council. Such investment “supports good paying, middle class jobs and at the same time it sets us up for long term competitiveness in this global marketplace,” he said.
Unlike his plan to tax wealthy individuals, however, parts of Obama’s corporate tax proposal bear a resemblance to reforms that Republican leaders have embraced—though Republicans have pushed for significantly lower tax rates.
Both Republicans and Democrats want to reform the way that overseas earnings are taxed, acknowledging that the current system encourages tax avoidance. Before leaving office, former GOP Rep. and Ways and Means Chairman Dave Camp proposed a one-time tax of 8.75% on corporate cash parked overseas, which he estimated would provide $170 billion in infrastructure spending. Like Obama, he saw the one-time tax as a step in transitioning toward a new international tax system. But Camp’s plan failed to move forward in the House, and he has since left Congress.
Obama’s budget also includes the individual tax reforms that he unveiled last month, which include higher taxes on inheritances, capital gains and dividends for the country’s wealthiest individuals. The president wants to use the new taxes on the wealthy to finance new programs for lower- and middle-income families, including expanded tax credits for child care, households with two working parents and free community college for qualified students.
“The income tax increases primarily affect those with very high incomes and those with a substantial amount of capital assets,” concluded the Tax Policy Center in a new analysis of Obama’s individual tax reforms. Overall, the Center estimated, “about 30% of tax units would pay lower income taxes while about 4% would pay more,” with the greatest benefits going to “low-income single workers and working age households with children.”
“Right now, the tax code is full of loopholes for special interest. I think we should fix that and use savings to cut taxes for middle class families,” Obama said on Monday.
While Obama’s tax proposals have attracted the most attention—and scorn from Republicans—they’re only one piece of his expansive budget proposal. The proposal would increase overall discretionary spending by 7%, or $74 billion, above the budget caps imposed by sequestration. That would increase funding for domestic program like research and development as well as increased national defense spending.
“I’m not going to accept a budget that locks in sequestration,” Obama said, calling it “mindless austerity.” His budget pays for the reversed cuts through changes to mandatory spending and new tax revenue, including better IRS tax collection and the closure of the so-called “carried interest loophole” that benefits hedge fund managers.
Under the president’s budget, the government would accrue a $474 billion deficit that would be about 2.5% of the gross domestic product. The deficit-to-GDP ratio would remain under 3% for the rest of 2025, which would be below average since the 1980s. Part of that would be due to the budget’s $1.8 trillion in deficit reduction through comprehensive immigration reform, higher taxes on the wealthy, and health savings through new Medicare co-pays, cuts to Medicare drug providers and other changes.
Republicans quickly attacked Obama’s budget as more “tax-and-spend” policies that would expand the federal bureaucracy. “Unfortunately, what we saw this morning was another top-down, backward-looking document that caters to powerful political bosses on the left and never balances—ever,” Senate Majority Leader Mitch McConnell, Republican of Kentucky, said in a statement.
Some liberal groups, meanwhile, said the proposal was too modest. “President Obama’s budget proposal to increase infrastructure investment is an important step in the right direction. But it does not go nearly far enough. Our economy needs trillions of dollars in investment to drive the productivity growth vital to raising wages,” said AFL-CIO president Richard Trumka.
Republicans and Democrats failed to come to a long-term budget agreement after more than three years of negotiations, as Democrats refused to cut entitlements without tax hikes, and Republicans refused to hike taxes beyond those in the 2013 fiscal cliff deal. Rep. Paul Ryan and Sen. Patty Murray worked out a two-year budget agreement to set spending levels through 2014 and 2015, but it didn’t address the long-term deficit and only provided partial relief from sequestration.
With Republicans now in full control of Congress, a significant budget agreement is even less likely, and the GOP continues to insist that tax reform needs to be part of a larger overhaul that ultimately reduces rates across the board. But White House Press Secretary Josh Earnest said that the administration remained serious about turning Obama’s proposal into a legislative reality. ”Our principles goals here are around bipartisanship and actually getting action on Capitol Hill around this, not just a talking point,” Earnest said.