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The United States Treasury has issued a report presenting President Barack Obama’s revenue-neutral proposals for corporate tax reform, cutting the tax rate to 28% from the current 35% rate, but also closing loopholes used by corporations to reduce their tax burdens.
Introducing the proposals, Treasury Secretary Tim Geithner confirmed that, “in order to make us more competitive and create jobs here at home, we must reform our corporate tax code. The President’s framework would boost growth and provide American companies with incentives to invest in the US, while simplifying and cutting taxes for small businesses.”
Geithner added that the current US corporate tax system, featuring the second highest statutory corporate tax rate among developed countries and a large number of tax expenditures “puts American businesses - especially those in areas like manufacturing that are subject to more intense international competition - at a disadvantage.”
“The current business tax system is uncompetitive, unfair, and inefficient,” he added, “distorting choices about where to produce, what to invest in, how to finance a business, and how to incorporate.”
He also insisted that the Obama Administration is willing to work with lawmakers on a bipartisan basis to enact tax reform, in a fiscally responsible manner - with fewer tax expenditures, less complexity and lower rates, without adding to the deficit.
The report’s framework for reform therefore begins with its proposals to eliminate tax loopholes and subsidies, broaden the tax base and cut the corporate tax rate to 28%, putting the US “in line with major competitor countries and encouraging greater investment”.
“While the US is generally in line with competitor countries when it comes to the overall average level of taxes paid on corporate investments,” it adds, “this is not an argument against reform; in fact, it is an argument and motivation for reform. The trade-off of a higher statutory tax rate in exchange for a narrower tax base with numerous loopholes and subsidies is a poor one.”
The President’s plan would “start from a presumption that we should eliminate all tax expenditures for specific industries, with the few exceptions that are critical to broader growth or fairness.”
For example, the “last-in, first-out” method of accounting for inventories would be ended; oil and gas tax preferences would be eliminated, including, for instance, repealing the expensing of intangible drilling costs and the percentage depletion for oil and natural gas wells; and the treatment of insurance industry products would be reformed to stop major corporations using them as a form of tax shelter for major corporations.
The treatment of “carried interest” as ordinary income, rather than capital gains, would also be established, and the special depreciation rules for corporate purchases of aircraft would be eliminated.
Secondly, it is proposed to strengthen American manufacturing and innovation, by refocusing the manufacturing deduction and use the consequent savings to reduce the effective rate on manufacturing to no more than 25%, while encouraging greater research and development and the production of clean energy.
Thirdly, it would also strengthen the US international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment. “Our tax system,” it is said, “should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the US tax base”.
Fourthly, taxes would be simplified and cut for small businesses. Tax filing would be made simpler for small businesses and entrepreneurs, so that they can focus on growing their businesses rather than filling out tax returns.
And, finally, business tax reform should be fully paid for and lead to greater fiscal responsibility, by either eliminating or making permanent, and fully paying for, temporary tax provisions now in the tax code.
However, despite the fact that, while this is the first Obama proposal for corporate tax reform, and it includes certain elements which can be found in other proposals, including those coming out of the Republican Party, it is unlikely to be passed through a Congress that has been paralyzed on tax matters, at least until the November elections.
For example, while the House of Representatives’ Ways and Means Committee Chairman Dave Camp (R - Michigan) appreciated that “the Administration has finally weighed in with a framework for corporate tax reform,” and he was pleased that the “proposal adopts many of the same principles of reform that House Republicans have championed, such as lowering rates by broadening the tax base and closing loopholes,” he also pointed to some policy differences.
“Chief among those,” he pointed out, “is the Administration’s apparent decision to expand a system that doubles taxes American employers when they try to compete with foreign corporations. I also want to more closely review how the Administration intends to bring home roughly USD1 trillion in American profits that are currently trapped overseas.”
Above all, he commented that “the Administration’s proposal fails to address the need for comprehensive reform of our tax code. More than half of all business income is taxed at the individual (rather than corporate) tax rates, and a corporate-only proposal does not address the needs of those job creators, the vast majority of which are small businesses. If we want to truly reinvigorate our economy and get Americans working again, we must address comprehensive tax reform.”
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