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Lew Signals Obama Budget Won’t Set Specifics on Corporate Taxes

Jack Lew White House Budget Director
Jack Lew, White House budget director, said “The best way to get to a positive outcome is get broad agreement on the goals and work toward them.” Photographer: Andrew Harrer/Bloomberg

President Barack Obama’s budget director signaled the administration won’t back a specific proposal for overhauling corporate taxes in the spending plan it releases next week.

Obama has said he wants corporate tax laws rewritten to lower rates and limit breaks for individual industries and companies to make up for lost revenue. That should be done by beginning a discussion with lawmakers about principles rather than setting out a detailed framework in the budget, said Jacob Lew, director of the Office of Management and Budget.

“The notion that that starts with a fixed plan is probably not the best way to get to a positive outcome,” Lew said in an interview yesterday at Bloomberg News’s Washington bureau. “The best way to get to a positive outcome is get broad agreement on the goals and work toward them.”

The top corporate tax rate of 35 percent, when combined with state and local levies, will be the highest in the world after Japan reduces its rate later this year. A variety of provisions in the tax code allows some companies to pay much lower effective rates, which could rise if their tax breaks are eliminated.

At least 80 publicly traded U.S. companies with a market capitalization of more than $10 billion on Jan. 6 had an effective tax rate below 29 percent on income reported over the previous four years, according to a Feb. 3 report by the Washington Research Group of MF Global.

1.8 Percent

They ranged from companies domiciled in tax havens such as Carnival Corp., the world’s biggest cruise line operator, which is incorporated in Panama, with an effective rate of 1.8 percent, to online retailers like Seattle-based, which reported an actual rate of 12.8 percent, the report showed.

Other companies vulnerable to a higher tax bill if deductions and credits are limited, according to the report, include Fairfield, Connecticut-based General Electric Co., which paid an effective rate of 16.3 percent; San Diego-based Qualcomm Inc., which paid an effective rate of 17.4 percent; and New York-based Pfizer Inc., which paid an effective rate of 18.8 percent.

Obama said in his Jan. 25 State of the Union address that the corporate tax code has been “rigged” by lobbyists and “makes no sense.” In a Feb. 7 speech to the U.S. Chamber of Commerce, he asked business leaders to help him overcome entrenched interests to change a “burdensome” tax system that ends up steering investment toward tax breaks instead of products and services.

Fiscal Commission

Obama’s fiscal commission supported dropping the corporate rate to less than 30 percent and perhaps as low as 23 percent, accompanied by an elimination of all business tax breaks.

Treasury Secretary Timothy Geithner has met in recent weeks with business representatives and economists to discuss ideas for a corporate tax code overhaul.

While the U.S. unemployment rate has remained at least 9 percent for the longest stretch since monthly data was first compiled in 1948, U.S. corporations saw their profits rebound to a near record by the end of last year’s third quarter, and nonfinancial companies held $1.9 trillion in cash on their balance sheets, according to Commerce Department and Federal Reserve data.

Lew spoke before the scheduled Feb. 14 release of a White House budget for fiscal year 2012. Concern about the deficit, forecast by the Congressional Budget Office to hit $1.5 trillion this year, is fueling calls by congressional Republicans to roll back spending. Obama already has called for a five-year freeze on discretionary spending outside of security and national defense.

Social Security

Lew declined to address whether changes for Social Security would be proposed in the budget. He stressed that any move to alter the federal retirement insurance system would require broad support.

Obama “thinks that we need to work on a bipartisan basis to put together a long-term plan so that Social Security remains sound for future generations without slashing benefits,” he said.

Senate Minority Leader Mitch McConnell said yesterday it will be up to Obama to take the lead in suggesting politically sensitive cuts to Social Security and other entitlement programs.

“There will be no entitlement reform without presidential leadership,” the Kentucky Republican said.

No Painless Cuts

Lew said the budget will include cuts that are likely to be challenged by members of both parties in Congress.

“You cannot accomplish the savings on the scale that we needed to unless we took reductions in the areas that are also things that we care about,” Lew said. “We didn’t just take a path towards easy and painless reductions.”

Obama’s spending freeze would save the government more than $400 billion over the next decade, according to the administration. Non-defense discretionary spending accounted for about 14 percent of Obama’s budget for last year, which totaled $3.8 trillion.

The president has said he will cut some areas of the budget, while spending more on education, infrastructure and research. Vice President Joe Biden said yesterday the budget will propose spending $53 billion over six years for construction of high-speed railroads. Obama also is calling for aid for state unemployment-insurance programs burdened by debt because of high jobless rates.

At the Pentagon, the cost of war spending will be reduced to about $117 billion, down from the fiscal 2011 request of $159 billion, reflecting Obama’s plan to reduce troop levels in the war zones and tougher White House rules on what costs can be included in the war budget.

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