Paulson pushes for corporate tax cuts despite political climate

Even though the Bush administration’s influence with Congress is at an all-time low, Treasury Secretary Henry Paulson is launching an effort to reduce the U.S. corporate tax rate, now one of the world’s highest at 39 percent.

Flanked by former Federal Reserve Chairman Alan Greenspan and several corporate heavyweights, Paulson on Thursday described the tax rate as a drag on business that stifles investment and hurts U.S. workers.

“Now, when our economy is in a position of strength, is an opportune time to discuss the business tax system and its impact on workers, investment and the United States’ ability to compete in the world marketplace,” Paulson said in opening remarks for a one-day tax conference hosted by the Treasury.

Getting the Democratic Congress to cut corporate taxes, however, is a long shot, and Greenspan said pressures on entitlement programs created by the pending retirement of the baby boomer generation will only make it more difficult.

“The pressure is going to be for higher taxes, not lower taxes, and negotiating anything that will lower corporate taxes will run into political resistance,” Greenspan said.

Conservative leader Grover Norquist says Paulson has no illusion that this Congress will pass corporate tax relief. But he said Paulson is doing the right thing by instigating a policy discussion that could reap rewards after Paulson and other administration figures leave Washington.

“Paulson is coming up with some suggestions on reforming tax policy that could pass three, five, seven years from now,” Norquist told reporters.

“It’s easy to look ahead and see this line across the road, which is the day we leave Washington, and figure everything has to be done by that date because the world ends if we’re not in Washington,” Norquist added. “Well, of course it doesn’t end if you’re not in Washington.”

Andrew DeSouza, a Treasury spokesman on tax policy, acknowledged the current political climate is difficult for moving tax legislation. He said Paulson plans to take in information from Thursday’s conference, which is being attended by a range of economists and business representatives, and then take some time to consider future steps.  

Paulson would be “very pleased” if serious talks on reforming business taxes take place in the next 18 months while the Bush administration is in office or after he leaves Treasury, DeSouza added.

Paulson earlier this week unveiled a paper for the conference laying out his ideas, including the argument that the economy would run more efficiently if the corporate tax rate were reduced. Eliminating special tax breaks like the research and development (R&D) tax credit could offset the cost of reducing the corporate rate, the paper suggests.

That argument found support from business leaders at the conference.

“I would trade it in a minute for a simpler, lower rate,” Oracle President Safra Catz said of the R&D tax credit.

“I would happily trade off the credits for a lower rate and simplification,” agreed Jim Owens, chairman of Caterpillar, a heavy-machinery manufacturer.

Other groups, however, say that while they support lowering the corporate tax rate, they would oppose efforts to eliminate the R&D tax credit. For example, the National Association of Manufacturers (NAM) wants to increase the tax credit, which it sees as helping U.S. businesses remain competitive, according to J.P. Fielder, a spokesman for the organization.

“Countries increasingly are vying to capture global R&D because they understand it is a catalyst for economic growth,” Jay Timmons, a senior vice president at NAM, said in a statement. “It is essential that the U.S. tax code include an R&D tax credit that is competitive with those of our trading partners.”

Meanwhile, Greenspan was critical of tax policies that suggest the U.S. is becoming closed to foreign investment. “I think there are signs we are gradually moving toward a protectionist, closed society,” said Greenspan, who noted that corporations are choosing to buy back stock instead of using it for capital investments. He added it was “regrettable” that a great deal of populism remains in the country.

Separately, Owens said it was “unbelievable” that it is a struggle to get Congress to approve several trade agreements with small Latin American countries.