DLA Piper | Publications | Tax Policy in the Obama Administration: Expect Major Changes Page 1 of 3
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21 NOV 2008
Tax Policy in the Obama Administration: Expect Major Changes
ARTICLE INTERNATIONAL TAX NEWSLETTER
by Evan Migdail
Tax policy in the Obama Administration will serve a far different purpose that it did during the last 13 years when Republicans were in control of either the Congress or the White House, and this could have serious implications for multinationals. Republicans tend to view tax policy, and especially tax cuts, as ends in themselves--a means to leave spending decisions in the hands of individuals and companies and to reduce government’s funding sources. While in power, the Republican Congress and President George W. Bush repeatedly cut taxes. For the most part, these Republican tax cuts were based on the philosophy that the government should not impose guidance or restrictions on how the tax cuts should be used. President Bush’s 2001 individual rate cuts were across the board and unconditional, on the assumption that individuals at all income levels deserve rate reduction. Conventional wisdom suggests that presidential candidates should avoid proposing tax increases during the campaign. President-Elect Barack Obama flouted this tradition, clearly and consistently proposing certain types of tax increases. He has every reason to conclude that his broad-based victory is a mandate to proceed with his plans. While the Republican Administration views tax cuts as a policy goal in and of itself, the Obama Administration is more likely to view tax policy as an adjunct to economic policy. It will likely focus most of its attention on the middle class, the strata of society regarded as the most affected by the economic downturn and that potentially represents the best hope for recovery. Tax Cut for Middle Class: Centerpiece of Economic Stimulus The President-Elect appears eager to make a tax cut for the middle class the centerpiece of an
http://www.dlapiper.com/obama_tax_policy/
11/24/2008
DLA Piper | Publications | Tax Policy in the Obama Administration: Expect Major Changes Page 2 of 3
economic stimulus bill that the new Congress is expected to work on shortly after taking office on January 6, 2009. Such a bill could be ready for the President to sign into law shortly after he takes office on January 20. The economists who are advising the President-Elect believe that the economy is suffering from a lack of consumer demand exacerbated by increasing job losses and that a tax cut for the middle class, coupled with a massive public works program to create jobs, may be the best prescription to stimulate the economy. In contrast, in 2002 when the Bush Administration proposed economic stimulus measures following the terrorist attacks of September 11, those proposals focused on cutting corporate taxes. Corporate Tax Relief, with Conditions While the main focus of the President-Elect’s tax proposals is likely to be the middle class, the Obama Administration and Congress may well propose corporate tax relief--but it likely will come with conditions. For example, the new Administration could propose tax benefits for investment, such as an extension of the soon-to-expire bonus depreciation allowance or some type of investment tax credit, but these might be conditioned on the taxpayer investing in certain activities or communities, or maintaining certain levels of employee benefits. It is very likely that the new Administration will favor tax benefits tied to achieving certain levels of environmental protection. Changes in the areas of executive and nonqualified deferred compensation are likely as well, with the overlying concept to tie executive pay more closely to corporate performance and to give shareholders greater rights to review executive compensation. The theme of protecting the middle class and rewarding corporate behavior that protects American workers also explains the President-Elect’s view of multinationals, both on the tax side and with respect to trade. The theme of rewarding companies for creating economic activity in the United States and punishing those who export jobs and plants is found repeatedly in the President-Elect’s campaign literature as well as in the 2008 Democratic Party Platform, which states: “We will invest in American jobs and end the tax breaks that ship jobs overseas. We will shut down the corporate loopholes and tax havens and use the money so that we can provide an immediate middle-class tax cut that will offer relief to workers and their families.” In 2007, then-Senator Obama introduced the Patriot Employer Act in the Senate, a proposal to provide an incremental tax credit of $3,000 for every new job a company creates in the United States as opposed to overseas. The credit was conditioned on the company also providing certain levels of health and retirement benefits as well as union organizing rights. The proposal would have achieved two public policy goals: to incentivize employers to provide a certain level of economic protection to employees, and protect the domestic American workforce. Supporting Trade Agreements If They Protect US Workers, Environment On the trade side, the President-Elect has indicated that he would not support pending free trade agreements, such as the one between the US and Colombia, unless they contain stronger protections for US workers and the environment. After taking office he is expected to order an interagency study of the North American Free Trade Agreement to assess its impact on domestic jobs and the environment in order, to determine whether it should be reopened as candidate Obama proposed during the early Democratic primaries. Of course, President Obama will not be able to enact tax law changes on his own; he will need the
http://www.dlapiper.com/obama_tax_policy/
11/24/2008
DLA Piper | Publications | Tax Policy in the Obama Administration: Expect Major Changes Page 3 of 3
support of majorities in the House and Senate. But with Democrats enjoying the largest majority any party has had in the House of Representatives since they were last in power in 1994, and approaching a 60-vote supermajority in the Senate, the President is likely to realize many of his economic and tax policy goals.
http://www.dlapiper.com/obama_tax_policy/
11/24/2008