Obama urges corporate tax cut, closing loopholes

WASHINGTON Wed Feb 22, 2012 5:16pm EST

President Barack Obama addresses the audience attending the ''In Performance at the White House'' event, at which music legends and contemporary artists perform to celebrate blues music and in recognition of Black History Month, in Washington February 21, 2012. REUTERS/Chris Kleponis

President Barack Obama addresses the audience attending the ''In Performance at the White House'' event, at which music legends and contemporary artists perform to celebrate blues music and in recognition of Black History Month, in Washington February 21, 2012.

Credit: Reuters/Chris Kleponis

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WASHINGTON (Reuters) - President Barack Obama made an opening offer in what could be a long negotiation with corporate America on Wednesday, putting forward his first clear plan to cut the corporate tax rate.

Though it has little chance of becoming law in an election year with Congress deeply divided on fiscal issues, Obama's plan aligns him roughly with the Republican presidential challengers and could minimize the corporate tax rate as a political issue.

The president proposed cutting the top corporate rate to 28 percent from 35 percent, addressing a long-standing gripe by U.S. corporations that the rate is too high.

Republican hopeful Mitt Romney on Wednesday unveiled proposals of his own calling for capping the individual income tax rate at 28 percent, down from 35 percent, and slashing the corporate rate to 25 percent, among other steps.

Though thanks to tax breaks many companies pay nowhere near the top U.S. corporate rate of 35 percent, the statutory top U.S. rate makes it the world's second-highest after Japan's.

In return for lowering the tax rate on businesses, Obama's plan calls for broadening the corporate tax base by ending a number of tax breaks, some spelled out earlier in his budgets.

The plan tries to reverse tax incentives for corporations to relocate jobs and research overseas, while giving domestic manufacturing operations bigger tax breaks.

In a new twist targeting companies that stash profits abroad to avoid paying U.S. taxes, the president proposes slapping a minimum tax on corporate profits earned in low-tax countries, though his plan did not spell out a rate. Factbox on upcoming U.S. 'fiscal cliff'.


Obama's plan was immediately criticized as inadequate by some business groups, while others said the plan was a step in the right direction, but short on details.

"We are only at the starting point of corporate tax reform, and the road is a long one," said Martin Sullivan, an editor for Tax Analysts and a former U.S. Treasury Department staff member.

In a move that critics said was made partly to counter the unveiling of Romney's plan, Obama's proposal was rolled out at a briefing by Treasury Secretary Timothy Geithner.

In a statement released later, Obama said, "Our current corporate tax system is outdated, unfair, and inefficient."

"It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world.

"It is unnecessarily complicated and forces America's small businesses to spend countless hours and dollars filing their taxes. It's not right, and it needs to change."

The last major rewrite of the tax code came in 1986 under Republican President Ronald Reagan, who raised corporate taxes.

Since then, the U.S. tax code has become riddled with deductions, exemptions and loopholes, each one defended by interest groups in Washington with hefty lobbying budgets.

Complicating any tax reform effort are the approaching congressional and presidential elections in November, as well as deep divisions in Congress that have prevented lawmakers from dealing effectively with tax and budget issues for many months.

Analyst Greg Valliere of Potomac Research Group called the timing of the release of the Obama plan a "cynical ploy" because of the release of Romney's plan. The Obama plan "has virtually no chance of winning enactment this year," Valliere said.


Romney, the former governor of Massachusetts, on Wednesday proposed a tax overhaul that he said would cut Americans' tax rates by 20 percent and limit deductions for the wealthy.

Romney's plan included some standard Republican wish list items, such as reducing the top corporate tax rate to 25 percent, eliminating the inheritance tax and repealing the alternative minimum tax. Romney proposed some limits on tax deductions. He said the popular deductions for home mortgage interest and charitable contributions would continue for most Americans, but "for high-income folks, we're going to cut back on that."

He said he would maintain the current 15 percent rate on capital gains and proposed that no Americans with annual income below $200,000 pay taxes on capital gains.

Republican rival Rick Santorum would cut the top corporate tax rate to 17.5 percent and exempt manufacturers from paying it entirely. Newt Gingrich would cut it to 12.5 percent.

Obama last week unveiled a $3.8 trillion budget-and-tax proposal that called for aggressive government spending to boost the economy and for higher taxes on the rich.

On Friday, Congress approved extending a payroll tax cut through the end of 2012, when its expiration will coincide with several other fiscal earthquakes: the expirations of individual tax cuts enacted under President George W. Bush, and $1.2 trillion in automatic budget cuts across all government programs imposed as part of last year's deal to raise the debt ceiling.

The confluence of these events could unleash new momentum for comprehensive overhaul of the tax system, but for now proposals along these lines will largely amount to political messaging, analysts said.

One tax break targeted in the Obama plan is the "carried interest" loophole that lets managers of private equity and some other funds pay the 15 percent capital gains tax rate on much of their earnings instead of the 35 percent top income tax rate.

The plan also takes aim at accelerated depreciation, a major tax break enjoyed by many companies, but details were scarce.


U.S.-based companies now pay wildly different effective tax rates, with many far below and some well above the 35 percent statutory rate. For example, big multinational companies like General Electric and Boeing are able to shift intellectual property abroad and enjoy low effective tax rates.

Retail companies and healthcare services are among those enjoying fewer tax breaks, so they could benefit from the plan.

Business groups are likely to oppose many elements of the Obama plan, including keeping the current "worldwide" system taxation that taxes profits earned abroad.

Big multinational companies have been lobbying for a tax holiday, known as repatriation, on profits earned abroad, which is missing from the proposal.

A senior administration official said repatriation might be reconsidered as part of the give-and-take when negotiating details with lawmakers in a transition to a new tax system.

Manufacturing is given special status in the plan, including an expanded credit and making permanent a research credit.

Still, the president of the National Association of Manufacturers, Jay Timmons, said that while it appreciates the effort, many elements "completely miss the mark."

(Writing by Kevin Drawbaugh and Kim Dixon; Editing by Howard Goller and Jackie Frank)

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Comments (50)
NewsDebbie wrote:
The GOP would rather keep the focus on sex and bedroom issues than jobs, the economy, or taxes. After being a Republican for 35 years (now Independent) I’ve never ever seen the party so so so sick.

Feb 21, 2012 8:12pm EST  --  Report as abuse
UnPartisan wrote:
“Corporations are clamoring for a cut in the top rate of 35 percent. That level is one of the world’s highest, though few U.S. corporations actually pay it due to assorted loopholes that make their effective tax rates lower.”

The Amerian combined (State + Feds) corporate Tax rate is the highest in the world currently. This is basically what was going on pre-Reagan with the tax code for the rich. It was one of the highest in the world but no one paid out at the top rate due to all of the loopholes. Lower the corporate tax rate which is second highest in the world, while at the same time you remove the subsidies and loopholes. In turn, just like Reagan you bring in more tax income and it is fair to everyone, not just the ones who can afford tax lawyers. I hope Obama does this. It would definitely give him more ammo for the election run up against Republicans.

Feb 21, 2012 8:49pm EST  --  Report as abuse
Sensibility wrote:
Potomac Research analyst Greg Valliere said: “Even if Geithner floats something and members of both parties say they’re interested, I simply cannot see a reform bill passing before the election, close to a zero percent chance.”

So, both parties actually want the same thing (lower rates but close the loopholes), but their not willing to make it happen because they want to use the issue as a cudgel in the campaign. Well, that makes a whole lot of sense.

Re-elect no one. It’s the only way to make a statement to all the politicians who would rather sling mud at each other than do their jobs.

Feb 21, 2012 11:11pm EST  --  Report as abuse
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