US Treasury floats business tax rate cut, VAT ideas

WASHINGTON, Dec 20 (Reuters) - The U.S. Treasury on Thursday proposed lowering corporate income tax rates to 28 percent and eliminating all special preferences as a possible means of making the U.S. business tax system more competitive with other countries.

The Treasury also floated other ideas, including replacing the corporate income tax with a "business activity tax" on gross receipts of goods and services sales, minus non-compensation costs, which would act as a value-added tax.

The tax proposals are part of a number of initiatives from Treasury Secretary Henry Paulson to boost the global competitiveness of U.S. capital markets and companies. He has said that the top-line corporate tax rate of about 39 percent have been undercut by many industrialized countries, while special tax credits, deductions and other preferences in the U.S. system distort business decisions.

Treasury officials acknowledged that the tax proposals would not gain much traction in the current Congress, but said they wanted to lay the groundwork for future debate on the issue.

"There is one year left in this administration and the likelihood of moving any legislation on this issue is remote," Robert Carroll, Treasury deputy assistant secretary for tax analysis, told a news briefing.

The cut to 28 percent would require elimination of all special preferences to make the change revenue neutral, the Treasury said. If accelerated depreciation of business investments is retained, the rate could drop to only 31 percent.

The business activity tax -- which Carroll compared to Japan's value-added tax -- would remove interest costs from the tax base, the Treasury said. This approach would improve U.S. economic performance, ultimately increasing the economy by roughly 2.0 to 2.5 percent, but would have various implementation and administrative problems.

The Treasury said a revenue-neutral tax rate cut would not expand the economy but would eliminate some distortions created by the present system, which discourages repatriation of foreign earnings and encourages investment decisions based on tax planning.

A bigger cut in the tax rate to around 20 percent or a greater expensing allowance would provide greater benefits for U.S. competitiveness but would involve a loss of revenues.

"It is a big question whether revenue-neutral reform can change the competitiveness of the United States," Carroll added. (Reporting by David Lawder and Alister Bull; Editing by Dan Grebler)