The Obama administration unveiled a new corporate-tax plan on Wednesday that could intensify the tax-reform debate in Washington but won't yield near-term reform.
Although some influential lawmakers have a strong appetite for attacking the tax code, that drive will almost certainly be eclipsed by election-year politics and the gridlock that has plagued even simple legislation.
Obama’s proposal would cut the corporate-tax rate from 35 percent to 28 percent by broadening the tax pool, imposing a minimum tax on foreign earnings, and cutting popular incentives that pepper the code. This would include eliminating many benefits that businesses widely use to achieve a much lower effective rate. Such steps are sure to enrage Big Business.
“The business tax system today is bad for economic growth and bad for job creation in the United States,” Treasury Secretary Timothy Geithner told reporters.
The United States currently has the second-highest statutory tax rate in the world and is set to take over the lead when Japan drops its rate in April. Republican leaders, including presidential candidate Mitt Romney, are expected to unveil a plan for corporate-tax reform on Wednesday. Romney has frequently called for a flatter, more uniform corporate-tax system, and he is expected to roll out a series of major economic plans this week.
Obama administration officials said that their proposal would simplify and make permanent manufacturing and research and experimentation credits to spur job growth. But the administration punted on several of the most difficult issues and remained quiet on how the government should make the rate-reduction revenue-neutral. Recognizing this, Geithner called the plan a starting point aimed at opening a tax-reform discussion with Congress.
“You have to do this in a way that is fiscally responsible and doesn’t add to future deficits.” Geithner said. “Any reforms that come out of Congress have to be fully paid for.” But he offered no further details on just how to achieve that.
Last year, the Joint Committee on Taxation found that cutting loopholes alone could not cover the cost of lowering the tax rate. The fight to find the remaining savings is not likely to be easy.
In recent years, tax reform has become a rallying cry for lawmakers of all political stripes and a near-constant talking point on Capitol Hill. Some in Congress have released plans of their own, but many lawmakers, including Sen. Max Baucus, D-Mont., the chairman of the Senate Finance Committee, insist that reform requires leadership from the White House. The new administration plan is the first step in that direction.
Still, a fundamental ideological divide runs along party lines over what shape the tax code should take and, importantly, whether reform should aim for increased revenue or just simplification of the code. That disagreement must be resolved before tax reform can really take off.
Hours after Obama released his plan, Republican presidential candidate Mitt Romney unveiled a very different approach to corporate tax reform. The plan would slash the individual tax rate from 35 percent to a permanent cap of 28 percent and would reduce corporate rates from 35 to 25 percent. He would also do away with the alternative minimum tax, cut the estate tax and freeze the current 15 percent rate on capital gains for all individuals making over $200,000 a year. Romney economic adviser Glenn Hubbard said spending cuts would pair with increased economic activity from the new tax code to make up for any revenue lost under the rate cuts.
Last year, the top tax writer in Congress, House Ways and Means Chairman Dave Camp, R-Mich., released a draft plan to cut the corporate rate to 25 percent and switch the United States to a territorial system of taxation. That plan, like most GOP corporate-tax proposals, relied on cutting undefined loopholes to make the rate reduction revenue-neutral.
But both Obama’s and Camp’s plans lack enough detail on the most controversial areas of reform. While Camp’s plan gives a fairly detailed outline of a GOP-favored territorial taxation system, he offered little on what loopholes could offset the reduced rate.
By contrast, the Obama plan offered more-detailed information on which programs would likely remain intact and expanded—such as manufacturing and research incentives—but failed to fully tackle the core Republican issue of taxation structure.
Geithner said that the administration's plan would include a new minimum tax on foreign earnings, something that could stoke frustration among multinational corporations. The plan also refers to changes to transfer pricing and would replace tax deductions for companies that relocate offshore in favor of incentives for those who bring jobs back to the United States.
Those issues may be only a sliver of the overall reform package, but they are sure to be ideological wedges that would require tough negotiations in even the most ideal political circumstances.
CORRECTION: An earlier version of this story stated the wrong day of the week for the plan's announcement. It was announced Wednesday.
Nancy Cook contributed.