Multinationals Win Battle Over Tax Hike

A little over a month ago, I asked whether President Obama's proposed international tax changes would succeed. Last spring, the administration presented its idea to change tax rules, forcing multinational corporations to pay higher taxes. While the administration liked to characterize these changes as closing loopholes, I disagreed with that assessment, noting that they would seriously hurt U.S. corporations' international competitiveness and overall revenue. According to the Wall Street Journal, multinationals can breathe a sigh of relief, as the Obama administration has shelved the idea -- for now.

The WSJ reports:

Obama aides say the administration has set the idea aside for now, but may return to it as part of a broader tax overhaul sometime next year. The White House had billed the proposed change as an overdue fix to the tax code and potentially a key revenue-raiser.

Lurking behind the tax debate was the administration's need for new sources of revenue to fund its increased spending. Jason Furman, a White House economic adviser, made that point clear at the end of a session with a dozen or so lobbyists in March. Catherine Schultz, head of tax policy at the National Foreign Trade Council, who was at the meeting, says Mr. Furman basically told the group: "We need the money."

And for that reason, I wouldn't get too excited that this measure is truly dead -- because it probably isn't. I suspect that the Obama administration is getting a bit skittish about the economy being worse than it expected. Its unemployment estimates from last spring predicted significantly lower unemployment:

This was the chart it used to justify the stimulus package back in January (opens .pdf). It predicted that the dark blue line would result in its passing. The red dots are actual unemployment that we've seen since then, which I added.

Clearly, the administration realizes that raising taxes on businesses probably isn't in the economy's best interest right now. But once unemployment starts declining, that could all change.

I still think it would be an unwise move. Since sustained high unemployment is likely, businesses need to be as healthy as possible so to hire more workers once the economy swings upward. I'm not sure how when nearly 10% of consumers are unemployed, they could lead the recovery. We might have to look towards business.

The Obama administration will certainly need more revenue eventually -- even if just to close the deficit without additional spending on its domestic agenda including health care. Getting that revenue by taking money away from businesses that could create jobs probably isn't the best way to do so, especially over the next few years.