Obama calls for cut in corporate tax, loopholes

WASHINGTON (Reuters) - U.S. President Barack Obama called on lawmakers on Tuesday to work with him to cut the corporate tax rate, but his pitch to offset lost revenues by slashing tax breaks cherished by companies could stall the effort.

U.S. President Barack Obama makes a point during his State of the Union address to a joint session of Congress on Capitol Hill in Washington, January 25, 2011. REUTERS/Molly Riley

“I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes,” Obama said in his State of the Union address to a joint session of Congress. “A parade of lobbyists has rigged the tax code to benefit particular companies and industries.”

At the same time, Obama said the nation cannot afford to make permanent lower tax rates for the wealthiest 2 percent of Americans.

The president has proposed cutting tens of billions of dollars in corporate tax preferences in his first two budgets, and on Tuesday he repeated his call for eliminating what he terms loopholes.

Among the business tax benefits Obama wants to scrap are those letting companies defer taxes on income earned abroad. Corporate America -- especially pharmaceutical and technology companies and multinationals like General Electric Co -- prize these tax provisions.

Big U.S. service companies with little presence abroad - for example health insurance companies - would benefit most from a rate cut, because they tend to pay close to the top 35 percent rate now.

And while Republicans and Democrats agree the top corporate rate is too steep, they clash over how to fund a rate cut. Obama on Tuesday repeated his position that any cut must be offset so as not to inflate the deficit.

“The billion-dollar question is how to pay for lower (corporate) tax rates that all economists believe are desirable,” said Mark Bloomfield, president of the American Council for Capital Formation, a business group.

While some companies would see lower rates from a corporate tax cut, others, such as those that do extensive business abroad, might see taxes rise.

The administration points to the myriad of deductions and credits that enable some companies to pay a rate much lower than the statutory 35 percent rate.

Companies dismiss this point and say the high corporate rate relative to other countries hamstrings them against foreign rivals.

The federal corporate rate in the United Kingdom is 28 percent, in South Korea 22 percent and in Ireland 12.5 percent.


Getting an overhaul of the corporate tax through Congress will be tough. Some Republicans, who took control the House of Representatives earlier this month, have defended many of the tax breaks Obama wants to cut. They also disagree with him on individual rates.

Dave Camp, chairman of the House Ways and Means Committee, said he welcomed Obama’s call for tax reform.

“It’s something that I’ve been interested in. We need to have a tax code that empowers job creation and is less complex and burdensome,” Camp told Reuters. “I welcome the comments on both the corporate or business rates as well as individual.”

“It’s a longer-term project but obviously having presidential support is critical,” he added.

Obama struck a deal with Republicans in December extending for two years lower tax rates that had been enacted under President George W. Bush.

Despite that deal, the president on Tuesday repeated his stance that the country’s fiscal situation is too dire for permanent extension of the cuts for the wealthiest Americans.

“We should ask millionaires to give up their tax break,” Obama said, according to the speech. “It’s not a matter of punishing their success. It’s about promoting America’s success.”

Administration officials have been meeting with corporate executives to gather ideas on a path toward a tax overhaul, though many say it will be a years-long process.

Additional reporting by Donna Smith; Editing by Eric Walsh