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Obama, GOP both want lower taxes for businesses


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Posted Online: Dec. 25, 2012, 6:38 pm
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McClatchy News Service
WASHINGTON -- As President Barack Obama and congressional Republicans wrangle over tax increases and spending cuts, they can agree on something: They want to lower the corporate tax rate.

The U.S. has the highest overall rate of any of the world's developed economies. It took the top spot in March after Japan reduced its rate, mimicking other countries that have lowered taxes to lure new businesses and keep existing companies from leaving.

Negotiations to avert automatic income tax increases and federal spending cuts scheduled to kick in Jan. 1 could provide the impetus for U.S. policymakers to tackle an overhaul of the corporate tax code next year.

The White House wants to put a corporate tax overhaul, along with changes to the individual income tax system, on a fast track as part of any deal with Republicans.

The centerpiece of an overhaul would be slashing the 35 percent corporate tax rate, a goal long sought by corporate executives and lobbyists.

"In the name of global competitiveness, I think that has largely been agreed to," Jim McNerney, chief executive of Boeing Co., said about how both parties view the need for major corporate tax changes.

In February, Obama proposed lowering the federal rate to 25 percent for manufacturing companies and to 28 percent for other firms. Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, has been pushing a plan to lower the rate to 25 percent for all corporations.

In both cases, the rate cuts would be accompanied by the elimination of some of the numerous tax breaks that allow many companies to pay a much lower effective tax rate _ and sometimes to avoid paying any corporate taxes at all.

"The administration's position on this is very much in sync with what Republicans say they want, which is a lower rate and a broader base," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and the former chief economist for Vice President Joe Biden.

But there are still obstacles to a deal.

Some Democrats want to use an overhaul to increase tax revenue from corporations, while Republicans want to keep the amount the same. The White House and congressional Republicans also differ on how the U.S. should treat money earned abroad.

And businesses are divided. Many small companies file taxes as individuals. They're opposed to any deal that would raise their rates while giving corporations a rate reduction.

Analysts said the obstacles could be overcome because there is consensus around the broader point that the U.S. needs to bring its corporate tax rate in line with other developed nations.

"Regardless of your political persuasion, it is unquestionably the case that the nominal U.S. corporate tax rate is much higher than that of peer countries," said Edward Kleinbard, a USC law professor and former chief of staff of Congress' Joint Committee on Taxation.

The case for corporate tax reform got a boost when the overall U.S. rate of 39.1 percent, which includes federal, state and local corporate taxes, became the highest this year among the 34 nations in the Organization for Economic Cooperation and Development. Two decades ago, the U.S. was 13th.

"At one time in the '80s, we had a competitive corporate tax rate," said Dorothy Coleman, vice president of tax and domestic economic policy for the National Association of Manufacturers. "We've fallen behind by standing still."

But the rate in the tax code isn't what many companies pay because of a host of deductions and tax credits. In 2011, the effective corporate tax rate in the U.S. was 29.2 percent, roughly in line with the 31.9 percent average of the six other largest developed economies, the Obama administration said.

The White House said that parity does not mean the statutory rate shouldn't be reduced. It simply means that many tax breaks should be eliminated, allowing the rate to be lowered without adding to the deficit.

Democrats and Republicans agree on that point. Those breaks, totaling $159 billion last year, include deductions for depreciation and research expenses as well as credits for domestic manufacturing, according to the Congressional Research Service.

Obama has proposed eliminating dozens of breaks for specific industries, particularly oil and gas production, while adding new breaks to encourage domestic manufacturing and alternative energy development.

Camp also wants to get rid of some deductions to bring the rate down to 25 percent for all companies. He wants a corporate tax overhaul to result in the same amount of money flowing from corporations to Washington.

Businesses have been pushing for such a revenue-neutral approach.

The White House has said its plan would not add to the deficit because the elimination of breaks would raise $250 billion over the next decade, enough to offset the rate cut. But it has not committed to a revenue-neutral approach, leaving open the possibility that it would push for more revenue from corporate taxes to reduce the deficit.

Some Democrats believe that corporations should be paying more in taxes to Washington.

"There's a lot of offshore tax havens that we should not allow to be sucking up money from our Treasury," said Sen. Carl Levin, D-Mich.. "Tens of billions of dollars a year are involved in these corporate loopholes."

Obama wants to set a new minimum tax rate on foreign corporate profits, even if they are never brought back to the U.S.

The U.S. is one of the few countries that taxes foreign earnings when they are brought back to the country, which leads many companies to keep the money offshore. Companies with foreign operations also often plow those earnings back into those countries.

Obama's minimum tax on foreign earnings probably is the biggest hurdle for corporate tax reform, analysts said.

Republicans and leading business groups want the U.S. to go in the other direction _ changing to a so-called territorial system in which profits are taxed only in the country where they were earned.

"America is 5 percent of the world's market. It's in our best interest that our companies compete overseas ... which means generating profits in those markets," said Carl Guardino, president of the Silicon Valley Leadership Group, which represents the region's businesses. "Let's stop hindering these American companies from earning profits overseas and bringing them home."

Michael Ettlinger, vice president of economic policy at the Center for American Progress, a liberal think tank, said there's a way to satisfy both sides on the issue. The U.S. could change to a system in which profits are taxed in the country where they were earned, except in the case of countries with very low tax rates. Profits from those countries would be taxed by the U.S. at a minimum rate to discourage companies from using low-tax countries as tax havens. Japan and Germany have a similar approach.



















 



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