Obama Backs Corporate Rate Cut Along With Tax Simplification

President Barack Obama called on Congress to cut the top U.S. corporate tax rate for the first time in 25 years “without adding to our deficit,” a sign that businesses will have to give up tax breaks in exchange for lower rates.

The president, in his State of the Union address to Congress last night, also pressed for simplifying the tax system for individuals, which would restructure how more than $1 trillion in revenue is collected annually.

“The best thing we could do on taxes for all Americans is to simplify the individual tax code,” he said, to applause from the audience. “This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.”

Some analysts said Obama’s willingness to consider a corporate tax overhaul along with tax simplification may lead to changes in the code.

“Tax reform has been like the weather, everyone talks about it but no one does anything about it,” said Pat Heck, a partner at the Washington law firm KL Gates and a former top aide to the Senate Finance Committee. “Tonight’s speech could be a game changer. While it would be naïve to think tax reform legislation will be drafted overnight, a long journey always begins with a first step.”

‘Disappointed’

Representative David Camp, a Michigan Republican who chairs the tax-writing House Ways and Means Committee, said he was “disappointed” by the lack of details in Obama’s call for a tax overhaul.

“I think it could have used a little bit more on his proposals on individual tax reform,” Camp said in an interview after the speech. “Frankly, we really need more of a path forward even on the corporate side. I think we need some more concrete plans.”

Obama’s proposal for a corporate tax-rate decrease, accompanied by removal of tax breaks, is at odds with that espoused by corporate chiefs. Robert McDonald, CEO of Procter & Gamble Co., and groups such as the Washington-based Business Roundtable have urged the administration and lawmakers to set aside deficit concerns for now to focus on rate reduction.

Each percentage-point reduction in the 35 percent corporate tax rate could cost $8 billion or more a year in foregone revenue to the Treasury, according to the congressional Joint Committee on Taxation.

Financing a rate cut could mean that corporate tax breaks such as a deduction for domestic manufacturing and production income and accelerated depreciation of capital expenses may have to be sacrificed.

Winners and Losers

“If it’s revenue neutral for businesses, there’s probably some winners and some losers,” said Daniel Shaviro, a professor of taxation at the New York University School of Law. “And when you take away a lot of special benefits, you tend to get losers complaining more than the winners celebrating.”

The top marginal corporate tax rate, or the rate paid on the last dollar of income earned, has stood at 35 percent since 1993.

Companies often pay a lower effective tax rate, after taking advantage of tax credits and deductions and keeping overseas earnings reinvested indefinitely. The U.S. is among a handful of countries that tax profits earned in other countries, though only when the money is brought home, or repatriated.

Obama’s call to cut the top rate “will be highly welcomed by the business community,” though it ought to be paired with changing the way overseas profits are taxed, said Drew Lyon, a principal in the Washington national tax services office of PricewaterhouseCoopers LLP. He said Obama should endorse switching from a worldwide system of taxation to a “territorial” system, where companies’ overseas branches and subsidiaries pay tax only to their host governments.

Deficit Concerns

A report by the Washington advocacy group Citizens for Tax Justice released before the speech said the goal should be to reduce the budget deficit, which was $1.3 trillion for the fiscal year ending Sept. 30. The report said Obama should follow President Ronald Reagan’s example in ending more corporate tax breaks than necessary to finance a rate cut.

The president in his speech also called for ending Bush-era income tax cuts for individuals earning more than $200,000 and married couples earning more than $250,000.

The tax cuts enacted under President George W. Bush for all income levels were extended through 2012 as part of a deal Obama worked out with congressional Republican leaders in December.

Obama also asked Congress to make permanent a stimulus tax credit for higher education expenses, up to $10,000 for four years of college. That proposal was estimated by the JCT last year to cost $58.1 billion over 10 years.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Peter Cohn in Washington at pcohn@bloomberg.net;

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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