Bloomberg News

Obama Administration Readies Plan to Drop Corporate Tax Rate

February 27, 2012

Feb. 22 (Bloomberg) -- The Obama administration will propose today reducing the U.S. corporate tax rate to 28 percent from 35 percent along with removing tax breaks for companies to help offset lost revenue, an administration official said.

The plan would eliminate dozens of tax breaks and reshape the current manufacturing deduction to reduce the tax rate on manufacturing to 25 percent, according to the official, who outlined the proposal on condition of anonymity because it hadn’t been released. The restructured tax code would still include incentives for research and development and renewable energy.

President Barack Obama and Treasury Secretary Timothy F. Geithner have said corporate taxation is an issue that could provide an area for agreement with congressional Republicans and business groups.

“There is, I hope, more room for common ground on this, and we need to use this opportunity now to start to lay the foundation for the fundamental change ahead,” Geithner told the House Ways and Means Committee on Feb. 15.

The plan may face opposition from Republicans who want net tax cuts, corporations who say the rate reduction should be deeper and companies that would lose tax breaks they now enjoy.

Business groups, including the U.S. Chamber of Commerce, have spent the past three years criticizing the administration’s approach to international taxation, which has focused on making it harder for companies to defer U.S. taxes on income earned outside the country.

International Competitiveness

“Countries around the world are promoting the international competitiveness of their companies and creating jobs by adopting modern tax laws that enhance the ability of their locally headquartered companies to serve foreign markets,” a coalition of business groups wrote to Obama on Feb. 8. They expressed concern Obama favors proposals that “would go in exactly the opposite direction,” raising taxes on U.S. companies with overseas operations.

Geithner told the Ways and Means Committee the administration will propose retaining breaks that directly support U.S. investment at home. Treasury officials previously said the research and development tax credit should survive a tax-code overhaul.

“We’ll have a very important debate about which of those types of incentives we should preserve, which ones we can’t afford any longer,” Geithner said.

Tougher Proposals

He also said the administration’s proposals would be “tougher” in some ways than those outlined by congressional Republicans.

The current U.S. corporate tax rate is the second-highest marginal rate in the world, behind Japan. Effective tax rates on U.S. companies are below 30 percent, in line with the tax burden in other major economies. Manufacturers in most industries can deduct 9 percent of their earnings from domestic production, meaning that they already get a lower tax rate.

Companies such as United Parcel Service Inc. and Macy’s Inc. have been urging a lowering of the corporate tax rate. Other companies, including Apple Inc. and Google Inc., have been lobbying for a tax holiday on profits earned outside the U.S.

Any change that isn’t a net tax cut would tend to raise taxes on companies that benefit from many tax breaks, such as drugmakers and technology companies, while lowering payments for retailers and others that don’t get many tax breaks under the current system.

Corporate Tax Revenue

The U.S. expects to collect $236.8 billion in corporate income taxes, or 1.5 percent of gross domestic product, in the fiscal year ending Sept. 30.

The administration has been working on a corporate tax overhaul for more than a year. In his 2011 State of the Union address, Obama blamed “a parade of lobbyists” for the complex tax code that leaves companies with disparate tax rates.

“Get rid of the loopholes,” he said. “Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years -- without adding to our deficit. It can be done.”

This year, the tax portion of Obama’s State of the Union speech focused on international tax avoidance and said he wanted to remove tax provisions that he said encourage companies to move jobs outside the country.

“From now on, every multinational company should have to pay a basic minimum tax,” he said. “And every penny should go towards lowering taxes for companies that choose to stay here and hire here in America.”

Minimum Tax

The administration’s budget, released Feb. 13, didn’t provide details on the minimum tax. It included corporate tax provisions Congress has blocked.

Representative Dave Camp, a Michigan Republican who heads the House Ways and Means Committee, has released part of a proposed corporate tax overhaul. Camp proposed a 25 percent top rate and changes to the international tax system that would let companies avoid paying U.S. taxes on most of the income they earn outside the country.

Last week, Camp urged Geithner to propose a comprehensive tax-code overhaul that would include changes to corporate and individual taxation.

The proposals from the administration and Camp are designed to not increase the federal budget deficit, in contrast with policies promoted by the Republican presidential candidates.

Mitt Romney, the former Massachusetts governor, wants to reduce the corporate tax rate to 25 percent before eliminating any tax breaks. Rick Santorum, the former Pennsylvania senator, wants to cut the rate to 17.5 percent and eliminate corporate taxes for manufacturers.

Newt Gingrich, the former House speaker, wants to cut the rate to 12.5 percent and let companies write off all capital investments immediately.

--Editors: Jim Rubin, Joe Sobczyk

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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