Obama’s ‘$4 Billion for Exxon’ Myth

November 1, 2008 • Commentary
This article appeared in The Wall Street Journal on November 1, 2008.

In the final days of the campaign, Barack Obama continues to land the same sucker punch on taxes he used in the debates — and John McCain continues to take it on the chin.

In the last debate, Sen. Obama said, “We both want to cut taxes, the difference is who we want to cut taxes for.… The centerpiece of [McCain’s] economic proposal is to provide $200 billion in additional tax breaks to some of the wealthiest corporations in America. Exxon Mobil, and other oil companies, for example, would get an additional $4 billion in tax breaks.”

That $200 billion figure is false. Yet FactCheck​.org and most reporters never bothered to ask Mr. Obama where he came up with it. FactCheck​.org did discover that Mr. Obama’s claim about “$4 billion in tax breaks for energy companies” came from a two‐​page memo from the Center for American Progress Action Fund — a political lobby headed by John Podesta, former chief of staff to Bill Clinton, with tax issues handled by two lawyers, Robert Gordon and James Kvaal, former policy directors for the John Kerry and John Edwards campaigns. Those lawyers confused average tax rates (after credits and deductions) with the 35% statutory rate on the next dollar of earnings, so that cutting the latter rate from 35% to 25% would supposedly cut big oil’s $13.4 billion tax bill by 28.5%, or $3.8 billion. That is not economics; it is not even competent bookkeeping.

The Committee for a Responsible Federal Budget, by contrast, correctly notes that, “Senator McCain has called for the repeal and reform of a number of tax preferences for oil companies,” which would raise the oil companies’ taxes by $5 billion in 2013.

When fact checkers do look into campaign claims on taxes, they invariably cite estimates from the Urban Institute and Brookings Institution’s Tax Policy Center (TPC). The TPC estimates that the McCain corporate tax cuts would lose $734.7 billion of revenue over 10 years (2009–2018). Mr. McCain would also allow immediate expensing through 2013 for equipment normally written‐​off over three to five years, but no deduction for interest expense if the investment was made with borrowed money. Once equipment has been written off in 2009 or 2010 it can’t be written‐​off in later years, so the estimated revenue loss over 10 years is only $45 billion, or $4.5 billion per year. Altogether, that adds up to $78 billion a year in corporate tax cuts, not $200 billion.

Yet the $78 billion TPC estimate is also nonsense because it’s entirely static. The estimate assumes raising or lowering corporate tax rates has no effect on corporate decisions about where to locate production, income or costs, and no effect on the economy’s performance. If that made sense, the corporate tax rate could be doubled to 70% and the only effect (according to TPC estimates) would be to double corporate tax receipts. Such a static analysis is obviously worthless, yet it is nonetheless crucial to the TPC’s estimates of the revenue supposedly lost from the McCain plan and its alleged distributional effects.

Mr. McCain proposes to cut the corporate tax rate to 30% in 2010-11, 28% in 2012–13, 26% in 2014, and 25% thereafter. The timing could be better. Why not cut the corporate tax rate to 28%-30% right away? Could anyone doubt that would help struggling businesses to minimize cutbacks and layoffs? Could anyone doubt it would invigorate the stock market?

Phasing in tax‐​rate reductions — as in 1981 and 2001 — has become a bad habit among Republicans. The trouble is that knowing tax rates will be lower in the future provides incentives to delay earning and reporting income until after they fall. In the American Economic Review, December 2006, University of Michigan economists Christopher House and Matthew Shapiro found “the phased‐​in tax cuts called for in the 2001 tax bill worked to depress employment as firms and workers waited for the lower tax rates to materialize.”

In the U.S today, the combined federal and state tax on corporate profits averages 40%, which is increasingly out of line with the rest of the world. The average corporate tax rate dropped to 25.9% in 2008 from 37.7% in 1996 among 97 countries surveyed by KPMG, and to 23.2% from 38% in the European Union. Corporate tax revenues typically increased as a share of GDP after tax rates were reduced. Countries with corporate tax rates from 12.5% to 25%, such as Ireland, Switzerland, Austria and Denmark, routinely collect more corporate tax revenue as a share of GDP than the anemic 2.1% figure the Congressional Budget Office projects for the U.S.

In a new Tax & Budget Bulletin at Cato​.org, Jack Mintz of the University of Calgary estimates that a federal‐​state corporate tax rate higher than 28% loses money for the government. Kimberly Clausing of Reed College estimated revenues would be maximized with a 33% federal and state tax. Kevin Hassett and Alex Brill of the American Enterprise Institute found “the revenue maximizing point has dropped over time, and is about 26%.” In all of these studies, cutting the federal tax to 28%-30% sooner rather than later is very likely to raise revenue.

Regardless who wins the election, an accelerated version of Mr. McCain’s original plan — to cut the corporate tax rate to 28%-30% and expense investments in business equipment — is by far the most potent “stimulus plan” anyone has yet proposed. And far from costing $200 billion a year, as Mr. Obama claims, it wouldn’t cost a dime.

This Commentary was adapted from a paper for Hillsdale College’s Free Market Forum.

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