Bloomberg News

Obama Administration Proposes Corporate Tax Rate Cut to 28%

February 29, 2012

(Updates with Camp statement and additional comment starting in sixth paragraph.)

Feb. 22 (Bloomberg) -- The Obama administration called for reducing the corporate tax rate to 28 percent from 35 percent, eliminating tax breaks and changing core features of the tax code such as interest deductibility.

The plan, which leaves many details up to Congress, would retain tax breaks for corporate research, manufacturing and renewable energy. Over the next decade, the proposal would raise $250 billion more than the current corporate tax system does, because expiring provisions would either be allowed to lapse or offset with revenue increases elsewhere.

“It is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America,” President Barack Obama said in a written statement.

The proposal includes ideas his administration has previously advanced and adds a few new ones. U.S.-based companies with overseas operations would face a new minimum tax on their global profits.

New taxes would be imposed on some insurance products, depreciation schedules would get longer and companies would face new restrictions on the deductibility of interest. Large companies that aren’t structured as corporations could face higher taxes, though the proposal isn’t specific on how that would happen.

‘Good Step’

Representative Dave Camp, the Michigan Republican who is chairman of the House Ways and Means Committee, said he appreciated the administration’s attention to corporate taxation even though there are disagreements over the taxation of income earned outside the country and Obama’s reluctance to offer a plan that also addresses individual taxation.

“While this is a good step by the administration,” he said in a statement, “I will borrow from the president’s own words to Congress from just yesterday: Don’t stop here. Keep going.”

Treasury Secretary Timothy F. Geithner released the proposal today in Washington. He called the current U.S. tax code “outdated” and “unfair.”

“The current tax code was written for a different economy in a different era,” he told reporters.

Geithner said he planned to meet with top congressional tax writers, including Camp, as early as next week.

The framework doesn’t detail how much of the new revenue would come from ending breaks and how much would come from changes to structural features such as the interest deduction.

‘Special Preferences’

“Today’s proposal falls short of the bold reforms that are sorely needed,” said Katherine Lugar, executive vice president for public affairs at the Retail Industry Leaders Association, a trade group in Arlington, Virginia, whose members include Gap Inc. and Target Corp.

In a statement, Lugar said the administration’s proposal preserves “special preferences” for some industries and doesn’t change international taxation to match what other countries have done.

The administration wants the manufacturing, research and clean-energy tax breaks to remain while other industry-specific tax breaks would end, officials told reporters in a briefing, on condition of anonymity.

“These subsidies distort choices about where companies should invest,” Geithner said.

Exemption for Hotels

Hotels and some other kinds of businesses with operations that by necessity exist offshore would be exempt from the proposed new minimum tax on global earnings, according to the officials.

Administration officials, members of Congress and business groups have been discussing a potential corporate tax overhaul for several years.

They disagree over how low the rate should go and on how income earned outside the U.S. should be taxed.

“This so-called framework is murky, ill-defined and contradictory to the goal of reducing complexity and making our tax code more efficient,” said Orrin Hatch of Utah, the top Republican on the Senate Finance Committee.

Camp has proposed a revenue-neutral overhaul of the corporate tax code that would drop the top rate to 25 percent and leave most foreign earnings of U.S. companies untaxed.

Foreign Profits

In contrast, the administration plan would continue to impose a U.S. tax on foreign profits and would make it harder for companies to defer that income.

The plan doesn’t include any mention of what would happen to the more than $1 trillion in untaxed offshore profits now held by U.S. companies. Some, including Apple Inc. and Google Inc., are calling for a tax holiday on repatriating that money. The administration officials said the treatment of untaxed earnings would have to be part of the conversation about imposing the minimum tax.

The Republican presidential candidates are all proposing to lower corporate taxes without eliminating many tax breaks. Mitt Romney, the former Massachusetts governor, wants a 25 percent rate. Rick Santorum, the former Pennsylvania senator, has proposed a 17.5 percent rate for most companies and a 0 percent rate for manufacturing.

Newt Gingrich, the former U.S. House speaker, has called for a 12.5 percent rate. Representative Ron Paul of Texas wants to set the corporate rate at 15 percent.

James Pinkerton, co-chairman of a coalition of companies advocating lower corporate tax rates, said the bipartisan agreement on a lower rate could signal a repeat of the 1986 overhaul of the tax code.

“We’re hopeful that the same larger spirit of public policy or the spirit of re-election -- between those two spirits, something will prevail that will make them want to do it this year,” said Pinkerton, whose RATE Coalition includes Nike Inc. and Viacom Inc.

--Editors: Katherine Rizzo, Robin Meszoly

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

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


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