White House unveils corporate tax changes to fix 'unfair' system

Calling the system unfair, the Obama administration on Wednesday proposed a broad overhaul of the corporate tax code designed to reduce the rate that most companies pay by axing dozens of breaks designed for specific industries, particularly oil and gas production.

The plan aims to lower the top tax rate paid by U.S. companies to 28% from 35%. And through the expansion of some widely used breaks, such as one for research and development, the administration wants to reduce the actual overall tax rate that most domestic businesses pay -- known as the effective rate -- to no more than 25% from the current 32%.

"The current tax code was written for a different economy in a different era. It needs to be reformed and modernized," said Treasury Secretary Timothy F. Geithner, noting that the last overhaul was in the 1980s, before the rise of the Internet, mobile phones and China's economy.

"Our business tax system is not just outdated," Geithner continued. "It is unfair and inefficient."

The plan would not add to the budget deficit because the elimination of many breaks would raise an additional $250 billion over the next 10 years, enough to offset the cost of the lower rate and a smaller set of targeted tax breaks.

A key component of the plan is to provide incentives for domestic manufacturing while reducing the tax advantages for companies to build facilities overseas. As part of that goal, Obama proposed a new minimum tax rate for money earned overseas by U.S.-based companies. Those firms now only have to pay U.S. taxes when they bring the money back to this country.

 "We want to reduce the opportunities the tax code now provides to shift income and investment outside the Untied States," Geithner said. In conjunction with those changes, the plan would include new tax breaks for the cost of bringing foreign jobs back to the U.S., he said.

The administration wants to get rid of several oil and gas industry tax breaks, such as the ability to write off certain costs related to drilling and use of wells. Offsetting those cuts would be an expansion of tax incentives for alternative energy investment, including making permanent a tax credit for the production of electricity from renewable sources.

The plan also would eliminate a tax break for hedge fund managers, private equity partners and other managers in partnerships. Most of their pay, known as carried interest, now is subject to a capital gains tax of 15%. Under Obama's plan, that income would be taxed at their ordinary income tax level, which could be as high as 35%.

The proposal tries to spur U.S. manufacturing and innovation by focusing and expanding a domestic production tax break on manufacturing. The research and development tax credit would be expanded, simplified and made permanent.

Right now, Congress extends the tax credit  for a year or two – and at times has allowed it to temporarily expire – leaving businesses unable to count on it.

Small businesses would see their taxes cut and simplified, with changes that include allowing them to write off the cost of up to $1 million in certain investments.

Geithner described the 23-page outline as a framework for corporate tax reform that was designed to start the process of crafting an overhaul. It was light on details, listing only some examples of tax breaks that would be targeted for elimination.

The proposal also did not include any legislative language that would be a starting point for Congress, which must approve any changes to the tax code.

Sen. Orrin Hatch (R-Utah), the top Republican on the Senate Finance Committee, said he was "profoundly disappointed" in the lack of detail in Obama's proposal.

“America’s tax system is broken to the point that it’s putting our nation at a competitive disadvantage around the world," Hatch said. "I’d hoped the White House would recognize the severity of the problem with a real plan and real leadership.  But, after months of promises, we instead got a set of bullet points designed more for the campaign trail than an actual blueprint for fixing our tax code."

The White House says it is holding out some hope that the politically divided Congress may find a way to advance some elements of the proposal. Both Democrats and Republicans  have advocated lowering corporate tax rates, while limiting some breaks and loopholes.

But in an election year it is far more likely that the fight over taxes will be used largely to underline each party’s campaign message, rather than a starting point for compromise.

“This process is going to take some time,” Geithner acknowledged. "It will be politically contentious."

He suggested that proposal’s key purpose is to lay down the administration’s marker for what is certain to a frenzy of tax policy making at the end of the year, likely after the election. That’s when Congress will be haggling over whether to extend the George W. Bush-era tax cuts, as well as whether to allow a series of steep cuts to domestic and military spending. 

The president’s plan includes proposals billed as boosting American manufacturing, a key part of Obama’s economic message. It revives calls to eliminate subsidies for the oil and gas industry, a long-held and politically popular move. Its minimum tax for multinational companies suggests an answer to news reports of major companies paying almost nothing in taxes  and would support what has become Obama’s leading campaign theme: making all Americans pay their “fair share.”

Republicans want the corporate income tax to go lower and for any overhaul to be revenue-neutral, meaning that the lower rate would be offset by eliminating some loopholes but corporations overall would not end up paying more taxes.

House Ways and Means Committee Chairman Dave Camp (R-Mich.) has proposed lowering the top corporate income tax rate to 25%, although Camp has not outlined which tax breaks would be eliminated to make up for the loss in revenue.

GOP presidential candidate Mitt Romney has proposed the same reduction, while his competitors go lower. Former Pennsylvania Sen. Rick Santorum is calling for a 17.5% corporate income tax rate, former House Speaker Newt Gingrich a 12.5% rate.

Obama’s plan was quickly dismissed by some as too timid to offset lower tax rates in most every other country.

"President Obama's tax proposal to cut the corporate tax rate to 28% would take the U.S.'s ranking from last place (34th) to 32nd place. We need more leadership than that to get a truly competitive and pro-growth tax system," said Alex Brill, a tax policy expert at the American Enterprise Institute.

[For the record, 3:30 p.m. Feb. 22: An earlier version of the post said the plan would tax profits earned by hedge fund managers, private equity partners and other managers in partnerships at the regular capital gains rate. In fact, the plan would tax their income at their ordinary-income tax level, which could be as high as 35%.]

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