The Obama administration proposed lowering the top corporate tax rate to 28 percent on Wednesday as part of a proposal to reform taxes on businesses.
The White House wants to pay for reducing the 35 percent corporate rate by ridding the tax code of a number of preferences and incentives. Administration officials are also seeking to drop the effective tax rate paid by manufacturers to at most 25 percent.
The proposals are all part of President Obama's long-awaited corporate tax reform framework, which has been in the works for months and which Treasury Secretary Timothy Geithner told reporters would revamp a system badly in need of an overhaul.
“Our business tax system is not just outdated,” Geithner said. “It is unfair and inefficient."
The administration framework comes months before policymakers will have to take a year-end look at a host of tax issues, including the expiring Bush tax cuts.
On Wednesday, Geithner said that he hoped the framework would jump-start tax reform negotiations with Congress, in advance of the year-end discussions.
But at the same time, while the administration’s release says that a tax overhaul should not add to the deficit, it was also tight-lipped about many key details — including the minimum amount of tax U.S. corporations with offshore operations should pay, a proposal that Obama floated in his State of the Union address.
Geithner plans on meeting with top congressional tax-writers next week, and a senior administration official also said Wednesday that the White House had reached out to House GOP leaders on the issue.
Both Republicans and Democrats have pointed to corporate tax reform as a possible area where the two parties can work together.
But with the presidential election front-and-center in 2012, many Washington observers believe there is little to no chance that a tax overhaul can be finished this year, and Geithner himself said Wednesday the issue was “politically contentious.”
“Some are going to say these proposals are too tough on business, and others will say they are not tough enough,” the Treasury secretary said.
Perhaps because of all that, the Obama administration’s release of its framework was somewhat muted, with the president not publicly discussing the plan and Geithner briefing reporters without cameras present.
Some Republicans on Capitol Hill and industry groups also swiftly panned the administration’s proposal, further underscoring the reform challenge.
“America’s tax system is broken to the point that it’s putting our nation at a competitive disadvantage around the world,” Sen. Orrin HatchOrrin HatchHow to marry housing policy and tax reform for millions of Americans Though flawed, complex Medicaid block grants have fighting chance A guide to the committees: Senate MORE of Utah, the ranking Republican on the Senate Finance Committee, said in a statement. “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.”
Proponents of tax reform have often noted that the U.S. corporate tax rate is now among the highest in the developed world, and needs to be lowered to help American businesses compete in the global marketplace.
But while agreeing that the corporate rate should be reduced, Democrats like Geithner have also been quick to argue that the effective tax rate U.S. companies pay is more in line with other industrialized countries, with corporations able to take advantage of a slew of tax breaks and lower tax rates offered elsewhere in the world.
With that in mind, administration officials said Wednesday that the White House would push to only keep tax preferences that serve as more than just a tax break for industry — which to them includes incentives for manufacturing, research and development and clean energy.
Other preferences, Geithner argued, should be excised from the code to pay for lower rates, including preferences for the oil-and-gas industry and the so-called “carried interest” break used by, among others, Mitt Romney and private equity executives.
“Whatever you call them, they are subsidies, they are spending through the tax code, and they are expensive," the Treasury secretary said.
In their efforts to help manufacturers, administration officials also said that their proposals would allow some companies in that sector to pay a rate lower than 25 percent.
The White House is calling to both expand and make permanent the popular tax credit for research and development, and would also increase a deduction claimed by manufacturers. High-tech companies would be able to double their manufacturing deduction.
As for small businesses, the administration is pushing to simplify the tax filing process for those firms.
And in a proposal that quickly drew criticism from Republicans, the White House said it no longer wants to add the costs of extending temporary tax provisions to the deficit.
A host of temporary measures, including the research credit, expired at the end of 2011, and lawmakers are working to extend them.
The administration estimates that continuing all temporary tax provisions would cost roughly $250 billion over a decade, leading some Republicans to quickly label that administration proposal a tax hike.
The GOP responses to the plan illustrated other challenges policymakers face on the reform front as well.
Republicans — including Romney and top lawmakers like Rep. Dave Camp, the chairman of the House Ways and Means Committee — have called for lowering the top corporate rate to 25 percent.
Camp (R-Mich.) also has proposed switching the United States to a so-called territorial system for taxing corporate profits, which would essentially shield much of the profits a company makes outside the United States from American taxation.
But that proposal is widely seen as being at odds with Obama’s plan for a minimum tax for multinationals.
On Wednesday, Camp welcomed the Obama framework, but also chided the administration for not calling for a more comprehensive overhaul of the tax code. He also suggested the White House proposals did not do enough to help American corporations compete abroad.
Many small businesses pay taxes through the individual code, leading lawmakers like Camp to say that the two codes need to be reformed in tandem. Romney offered his own tax proposal on Wednesday that would lower the top individual rate to 28 percent.
“So, while this is a good step by the administration, I will borrow from the president’s own words to Congress from just yesterday: Don’t stop here. Keep going,” Camp said in a statement.
Administration officials said Wednesday that, while they welcomed discussion of individual tax reform, the corporate reform framework could stand on its own. They also predicted that policymakers would be hard-pressed to reduce the corporate tax rate to 25 percent without adding to the deficit.
“The arithmetic is brutal on these calculations,” a senior administration official said. “To get a system that we think has a permanent 28 percent rate really requires a lot of heavy lifting.”
—This story was posted at 8:58 a.m. and updated at 2:20 p.m.