Feb. 7 (Bloomberg) -- President Barack Obama urged businesses to join him in an effort to change a “burdensome” corporate tax code, calling for “something smarter, something simpler, something fairer.”
In a speech to the U.S. Chamber of Commerce today, Obama said “various loopholes and carve-outs” distort economic decisions. He drew attention to the way that the deduction for interest encourages companies to borrow for new investments rather than use equity.
“You’ve got too many companies ending up making decisions based on what their tax director says instead of what their engineer designs or what their factories produce,” Obama said. “And that puts our entire economy at a disadvantage.”
Obama announced no new tax proposals in the speech. He reiterated his call from the State of the Union address on Jan. 25 for cutting the 35 percent top corporate tax rate without increasing the federal budget deficit. He made today’s speech in front of business executives and Chamber officials who have opposed many of the administration’s economic policies.
The relationship between Obama and the Chamber will be central to efforts to overhaul the tax code, because they can shape the framework of the debate in Congress, said Mel Schwarz, a partner at the Washington national tax office of Grant Thornton LLP.
“The two key players in getting the process started are at least as much business and the administration as they are congressional Republicans and congressional Democrats,” Schwarz said.
When Japan lowers its corporate tax rate this year the U.S. rate, when combined with state and local income taxes, will be the highest in the world.
Chamber officials and business executives say the high corporate rate makes U.S.-based corporations uncompetitive with companies based in most industrialized nations. Other companies face lower marginal tax rates and no taxes on income they earn outside their home countries.
Lowering the corporate rate without increasing the deficit would mean eliminating at least some deductions and credits that companies now use. Businesses that have paid low effective tax rates, such as General Electric Co. and Pfizer Inc., could pay more taxes under a system with a lower rate.
Tax Code Overhaul
Republicans, including Ways and Means Committee Chairman David Camp, say they want to pair changes to the corporate tax code with an overhaul of the individual tax code. They note that about 6 million companies, including many small businesses, pay taxes under the individual tax system. An overhaul could eliminate some deductions without lowering their tax rates.
In his Jan. 25 speech, Obama said he was “prepared to join” advocates of changing the individual tax code. He and other administration officials have kept that issue separate from the call for corporate tax changes, and Obama did not mention it in his remarks to the Chamber.
Obama also did not address another request from business leaders on the corporate tax code -- to consider a “territorial” tax system that would not tax profits earned outside the U.S.
In both of the budgets he has submitted as president, Obama has proposed making it more difficult for companies to defer U.S. taxes on profits they earn outside the country. He is set to propose his fiscal 2012 budget Feb. 14.
Obama also urged corporations to invest some of the almost $2 trillion they have on their balance sheets to expand and hire workers. He noted that a December tax law allowed businesses to write off 100 percent of certain capital investments, rather than take depreciation deductions over several years.
“As all of you know, it’s investments made now that will pay off as the economy rebounds,” Obama said. “And as you hire, you know that more Americans working will mean more sales for your companies. It will mean more demand for your products and services. It will mean higher profits for your companies. We can create a virtuous circle.”
Large companies such as Eaton Corp. and Honeywell International Inc. have said that because of low interest rates, they see little value in accelerating deductions.
The expensing tax incentive, combined with the interest deduction that Obama criticized earlier in the speech, provides an opportunity for companies to make arbitrage gains, tax analysts have said.
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