Max Baucus was right. The Senate Finance chairman predicted two weeks ago that an effort by President Barack Obama to start “beating the drums for tax reform” might backfire with Republicans.
Even before Obama’s speech in Tennessee yesterday on corporate taxation, Republicans were panning the president’s ideas, and the top minority member on Baucus’s committee, Orrin Hatch, was arguing that the president was trying to “undermine” a rewrite of the U.S. tax code.
“This cements my belief that they really don’t want corporate tax reform,” said Douglas Holtz-Eakin, president of the American Action Forum, a small-government group in Washington.
Obama’s call yesterday for using some revenue from tax changes to pay for infrastructure added another hurdle before Baucus and Representative Dave Camp, who are pursuing the most significant changes to the tax code since 1986. The bipartisan pair’s attempts to postpone fights over whether to raise additional revenue have been stymied by their colleagues, who want assurances before panel votes begin later this year.
Further evidence of the difficulties ahead for Baucus and Camp was signaled in Obama’s speech at an Amazon.com Inc. (AMZN:US) facility, where he called for a rewrite of business taxation without touching the individual tax code. He also altered his stance on revenue-neutral business tax changes, saying some revenue should be spent on infrastructure, not lowering rates.
The tax fight is just one front in Republicans’ policy differences with the president. House Republicans are resisting advancing a comprehensive immigration measure, and the two sides have failed to reach a deal to reduce the federal budget deficit, which the Congressional Budget Office projects to be $642 billion for the year ending Sept. 30.
Obama yesterday outlined a relatively simple principle: One-time revenue from tax changes should be used for one-time spending. That could include a tax on corporations’ accumulated offshore earnings and changes to depreciation schedules.
“I’m willing to work with Republicans on reforming our corporate tax code, as long as we use the money from transitioning to a simpler tax system for a significant investment in creating middle-class jobs,” Obama said. “That’s the deal.”
Otherwise, administration officials said, the federal budget deficit would rise later when the temporary revenue increases ran out.
“That money can’t responsibly be used to lower rates because it doesn’t sustain itself,” Gene Sperling, the director of the White House National Economic Council, told reporters on a conference call.
Hatch, a Utah Republican, said he was more concerned about next year and the next 10 years than with 2024.
“When are you guys just going to break out laughing?” Hatch, 79, said to reporters. “If we don’t get this moving in the right direction, you guys, your future’s gone, you young people.”
Several business groups reacted negatively to Obama’s speech. Organizations representing small businesses, including the National Federation of Independent Business, warned that an approach that reduces corporate tax rates to below 30 percent without affecting individual rates that top out near 40 percent would hurt millions of businesses that pay their taxes through their owners’ individual returns.
“Corporate tax reform should be part of a comprehensive fix for the individual and business tax codes, and corporate reform should be achieved in a revenue-neutral manner,” said John Engler, president of the Business Roundtable, an association of chief executives of large companies.
“Moreover, all revenues from corporate base-broadening measures should be applied to corporate rate reduction and to modernizing our international tax system, not for unrelated spending,” Engler, a former Republican governor of Michigan, said.
Camp, a Michigan Republican who heads the House Ways and Means Committee, issued a measured response in a joint statement with Baucus, a Montana Democrat.
Camp has already said he would use temporary revenue from taxing accumulated offshore earnings of U.S. companies to pay for a lighter tax burden on future foreign profits. Obama’s new principle poses a potential complication to Camp’s arithmetic.
In their statement, Camp and Baucus said they wanted to address individual and corporate taxes together.
“Making the tax code simpler and fairer by closing loopholes and lowering rates for families and employers of all sizes will strengthen our economy, while creating more jobs and higher wages,” they said. “We look forward to continuing to work with the administration.”
Separately, Baucus told reporters yesterday that it was “wonderful” that Obama was “pushing forward” on taxes.
Asked about his previous statement that Obama’s hands-off approach was helpful, Baucus said that the addition of infrastructure was favorable because the issue is less partisan.
Obama supports reducing the corporate tax rate to 28 percent for most companies and 25 percent for manufacturers, down from 35 percent today.
As outlined in a 2012 administration proposal, he would pay for those changes by curtailing tax breaks. One of the largest tax breaks for businesses is accelerated depreciation.
Making that tax benefit less available increases the chances that the administration would have to turn to other changes to lower the rate to 28 percent. Those could include the ability to deduct interest and limits on large businesses that now pay taxes through their owners’ individual returns.
“If you take money out of the corporate tax system and use it for other purposes, you will not end up with a system that allows our workers to be competitive in a global economy,” said Senator Rob Portman, an Ohio Republican. “There’s just no way to do it.”
By calling for revenue-raising tax changes, Obama is wading into a debate in Congress that is already making a tax overhaul difficult.
Republicans, led by Camp, want a revenue-neutral revision of the individual and corporate tax systems. Democrats are pushing Baucus to include in his plan as much as $975 billion in new revenue from individuals and companies.
Typically, congressional scorekeepers use a 10-year budget window to analyze policies. They should look beyond that because many tax policies have different effects in the short term and longer term, said Chuck Marr, federal tax policy director at the Center on Budget and Policy Priorities, a Washington group that favors proposals to aid low-income families.
“If one were to do corporate tax reform that was revenue-neutral or raised some money in the first 10 years, but started to lose money in the second 10, third 10 years, you’re making the problem worse,” he said.
Edward Kleinbard, a tax law professor at the University of Southern California in Los Angeles, said he read the materials the administration released yesterday as signaling Obama’s openness to a territorial tax system with a minimum tax that would be applied on a country-by-country basis.
Sperling said Obama hasn’t changed his position on what the international tax system should look like. Obama supports a global minimum tax and what Sperling described as a “hybrid” system.
In the current tax system, American companies owe U.S. taxes on all the income they earn around the world. They can receive tax credits for payments to foreign governments and don’t have to pay the U.S. until they repatriate the money.
“What the president has been for is to have a sounder hybrid system that has the right incentives for investment in job creation in the United States,” Sperling said. “So the president has not changed his basic principles there.”
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