Washington & Business January 21, 2010, 5:00PM EST

Taxes: Ready to Rumble

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Lawrence Summers, Obama's top economics adviser, is also skeptical about claims that U.S. tax rates are uncompetitively high. "If you look at taxes paid by corporations as a fraction of profits, they are quite low relative to international standards and historical American standards," he says.

All this has left business executives convinced they remain in the Administration's sights. They vow not to get suckered again, as many believe happened in 1986, when Congress last did a major rewrite of tax rates. By the time negotiations for the 1986 act were over, Congress had hiked the corporate share of the tax take to pay for cuts for individuals.

Much of the business community is stonewalling. In their submissions to the Volcker panel, groups like the National Association of Manufacturers (NAM) have been reluctant to go beyond general support for tax reform. "If we say we're ready to give up something to get lower rates, chances are they'd hear the first part but not the second," says Dorothy B. Coleman, NAM's head of tax policy.

THE PRESSURE BUILDS

In Congress, the Republicans—and middle-of-the-road Democrats chastened by their party's growing unpopularity—will hesitate to back any tax increases without serious spending cuts. "We see the fiscal problems as more driven by spending," says a top aide to one Republican member of the Senate Finance Committee. "If the purpose of any tax reform is to come up with more money, it will be very hard to get bipartisan support." Under pressure from Senators Judd Gregg (R-N.H.) and Kent Conrad (D-N.D.), the White House and Democratic leaders have agreed to form a bipartisan commission that would recommend ways to rein in the deficit. Whatever grand bargain the commission might reach to hike taxes and cut spending would not be made public until after the midterm elections, and Congress would vote on the package in its entirety. Backers argue that this would provide the political cover needed to make tough decisions—though Gregg blasted the Democratic plan as too weak to be effective.

Rangel, too, is angling to revive his reforms. Now he's pushing to drop the corporate rate to 28%. "There is tremendous potential for simplifying the corporate tax code and lowering the rate further," he says. Adjusting depreciation schedules to slow writedowns would help a lot, he argues. So would ending $31 billion in tax breaks for the oil and gas industry—another stalled Administration proposal likely to return. To date, Obama has shown little interest in Rangel's latest ideas.

With the loss of their filibuster-proof majority, Democrats will face an even tougher task getting any tax hike through the Senate. Still, the savviest lobbyists are quietly preparing for the day a "just say no" strategy doesn't cut it. The head of one major trade association, who played a key role in stalling Obama's tax proposals last year, has begun meeting with members to figure out, when forced, "what our bottom line is—what would we be willing to give up?"

The pressure is steadily building. Already, the House wants to end the current tax treatment of the "carried interest" earnings of private equity fund managers, which allows them to pay capital gains rates of 15% rather than higher income rates. The Administration is likely to pick up the cudgel on this one, too. As one House aide to a prominent Democrat puts it: "[Companies] had better engage, because a lot of these items will be taken away anyway."

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Sasseen is Washington bureau chief for BusinessWeek.