Obama proposes corporate tax cut and says system needs to change

President's plan would set a new corporate tax rate of 28% – but Republicans in Congress say that is still too high

guardian.co.uk, Associated Press, Wednesday 22 February 2012 

Barack Obama's plan would mean corporations would have to give up
dozens of cherished loopholes and subsidies. Photograph: Andrew Harrer/EPA

President Barack Obama on Wednesday proposed a lower corporate tax rate and an end to dozens of loopholes he said helps US companies move jobs and profits overseas. "It's not right and it needs to change," he said.

The president wants to lower the US corporate tax rate from the current 35%, the highest in the world after Japan. Under his plan, manufacturers would receive incentives so that their effective tax rate could be even lower.

Obama's election-year plan would set a new 28% corporate tax rate, still higher than the 25% rate sought by congressional Republicans.

"It's a framework that lowers the corporate tax rate and broadens the tax base in order to increase competitiveness for companies across the nation," Obama said in a statement.

Corporations would have to give up dozens of cherished loopholes and subsidies that they now enjoy. Corporations with overseas operations would also face an unspecified minimum tax on their foreign earnings.

The proposal outlined by Geithner would also eliminate tax loopholes and subsidies that Geithner called "fundamentally unfair."

Obama also would set a minimum tax on the foreign earning of US companies.

Chances of accomplishing such change in the tax system are slim in a year dominated mostly with presidential and congressional elections. But for Obama, the proposal is part of a larger tax plan that is central to his re-election strategy.

Treasury secretary Timothy Geithner, who rolled out the plan on Wednesday morning, acknowledged that the debate "will be politically contentious."

"Some will say these proposals are too tough on business, and others will say that they're not tough enough," he said.

Obama's plan would be part of a larger effort to overhaul the US tax system, and it dovetails with Obama's call for raising taxes on millionaires and maintaining current rates on individuals making $200,000 or less. But White House spokesman Jay Carney said Congress could act separately on the corporate tax component of Obama's overall tax strategy.

Republican reaction was mixed. House Ways and Means Committee chairman Dave Camp said he appreciated the administration's plan, though it set a corporate tax rate that is higher than the 25% he has proposed. He faulted Obama, however, for not offering a wholesale overhaul of the entire tax system for businesses and individuals.

"While this is a good step by the administration, I will borrow from the president's own words to Congress from just yesterday: 'Don't stop here. Keep going,'" Camp said in a statement. But seantor Orrin Hatch, the top Republican on the Senate Finance Committee, dismissed the president's plan as a "set of bullet points designed more for the campaign trail than an actual blueprint for fixing our tax code."

While the 35% nominal corporate tax rate ranks among the highest, deductions, credits and exemptions allow many corporations to pay taxes at a much lower rate.

Under the framework proposed by the administration, the rate cuts, closed loopholes and the minimum tax on overseas earning would result in no increase to the deficit.

That means that many businesses that slip through loopholes or enjoy subsidies and pay an effective tax rate that is substantially less than the 35% corporate tax could end up paying more under Obama's plan. Others, however, would pay less while some would simply benefit from a more simplified system.

Reducing the corporate tax rate from 35% to 28% would reduce tax revenues by about $700bn over the next decade, according to an estimate prepared in October by the Joint Committee on Taxation, the official scorekeeper for Congress.

That means lawmakers would have to find about $70bn a year in tax increases to keep the package from adding to the budget deficit, hardly an easy task. In 2010, the corporate income tax raised a total of $278bn, according to the Internal Revenue Service. Corporate income taxes have been shrinking as a share of overall federal taxes for decades. In 2010, corporate income taxes made up just 12% of all federal tax receipts, down from 24% in 1960, according to the IRS.

Geithner said the Obama plan aims to help US businesses, especially manufacturers who face strong international competition. Obama's plan would lower the effective rate for manufacturers to 25% by offering other tax incentives that emphasize development of clean energy systems.

Many members of both parties have said they favor overhauling the nation's individual and corporate tax systems, which they complain have rates that are too high and are riddled with too many deductions.

The corporate tax debate has made its way into the presidential contest. Mitt Romney has called for a 25% rate, Newt Gingrich would cut the corporate tax rate to 12.5%, and Rick Santorum would exempt domestic manufacturers from the corporate tax and halve the top rate for other businesses.

While Obama has been promoting various aspects of his economic agenda in personal appearances and speeches, the decision to leave the corporate tax plan to the Treasury Department to unveil signaled its lower priority.

What's more, the administration's framework leaves much for Congress to decide — a deliberate move by the administration to encourage negotiations but which also doesn't subject the plan to detailed scrutiny.

Obama's plan is not as ambitious as a House Republican proposal that would lower the corporate rate to 25%.

Still, Obama has said corporate tax rates are too high and has proposed eliminating tax breaks for American companies that move jobs and profits overseas. He also has proposed giving tax breaks to US manufacturers, to firms that return jobs to this country and to companies that relocate to some communities that have lost big employers.

Geithner told a House committee last week that the administration wants to create more incentives for corporations to invest in the United States.

"We want to bring down the rate, and we think we can, to a level that's closer to the average of that of our major competitors," Geithner told the House Ways and Means Committee.

White House economic adviser Gene Sperling has advocated a minimum tax on global profits. Currently many corporations do not invest overseas profits in the United States to avoid the 35% tax rate.

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