Why Obama Is Proposing Whopping Corporate Tax Cuts, and Why He's Wrong

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.