Corporate taxes: Cut rate? Sure. But loopholes?
Corporate taxes should be simplified and rate lowered, Obama says. But many loopholes have a powerful constituency.
Pablo Martinez Monsivais/Pool/AP
President Barack Obama's call to lower corporate tax rates is popular among business leaders and lawmakers from both parties. That support, however, won't be easy to maintain if the president ever gets specific about how to pay for the lower taxes.
Obama said in his State of the Union address that he wants to close corporate tax loopholes and use the additional revenue to lower corporate tax rates for the first time in 25 years — without adding to the budget deficit. The top corporate tax rate is 35 percent, among the highest in the industrialized world. However, federal tax laws are filled with so many credits, deductions and exemptions that few companies pay the top rate.
"Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries," Obama said in his speech Tuesday night. "Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense. It has to change."
Meanwhile, key congressional Republicans said Wednesday that tax reform shouldn't be limited tocorporate taxes — individual income taxes should also be revamped.
Obama's goal is to create a simpler tax code that encourages sound business decisions rather than aggressivetax planning. As it stands now, businesses and individuals spend more than 6 billion hours a year working to comply with the tax code, according to the National Taxpayer Advocate, an independent watchdog within the Internal Revenue Service.
It will take a sustained effort by the administration, however, to forge a consensus with lawmakers on reshuffling corporate taxes in a way that is sure to create winners and losers. The "loopholes" Obama talked about in his speech are regarded as cherished, well-deserved tax breaks by many lawmakers in both parties.
"I'm asking Democrats and Republicans to simplify the system," Obama said. "Get rid of the loopholes. Level the playing field."
There are tax breaks for investing in new equipment and buildings, spending on research and development and investing overseas. There are tax breaks for the owners of NASCAR race tracks and movie production companies. There are tax breaks for oil, natural gas and coal companies, as well as the producers of alternative fuels.
In all, the tax code runs 3.8 million words.
"Most of those words are in there because somebody's lobbyist wanted them in there," said Howard Gleckman, a fellow at the Urban Institute and editor of TaxVox, a blog on tax issues. "Everybody likes their special interest tax break."
Obama called for eliminating billions in tax breaks for oil companies to help fund research on alternative energy. It was a replay of his budget request last year, when he asked Congress to increase taxes on oil and gas companies by a total of $36.5 billion over the next decade. Congress largely ignored the request.
The nation's fiscal problems limit Obama's options. The federal budget deficit reached $1.3 trillion in the budget year that ended in September. The Congressional Budget Office predicted Wednesday that budget deficit will hit almost $1.5 trillion this year. Some economists say Obama should use tax reform to raise taxes, helping to reduce the federal budget deficit.
Obama wants corporate tax reform to be revenue-neutral, meaning the system would, overall, raise about the same amount of money it does today. Different industries, however, could have higher or lower tax bills, depending on whether tax rates are lowered enough to offset lost tax breaks.
Republican leaders in Congress said they are ready to work with Obama to lower corporate tax rates and simplify the tax code, but they will not support an overall increase in taxes.
"The complexity on the business side means that different companies, different industries pay different rates, and I think that calls into question the fundamental fairness of the tax code," said Rep. Dave Camp, R-Mich., chairman of the tax-writing House Ways and Means Committee.
Camp, who would play a big role in any tax reform package in the House, said Congress should work to revamp both the corporate income tax and the individual income tax. He noted that most small business owners pay business taxes through their individual tax returns.
"We cannot limit reform to just the corporate side of our tax code," Hatch said. "Instead, we must cast a wide net and examine the entirety of the tax code, which is overly burdensome and complex not only tocorporations, but small businesses and families as well."
Obama made only a passing reference in his speech to reforming individual income taxes, saying he would like to join members of Congress in their efforts to simplify the tax code for individuals. Gleckman said Obama would have to take a much more active role in getting any tax reform package through Congress.
"Presidential rhetoric is necessary but not sufficient to get this done," Gleckman said. "He's going to have to come up with a plan."
The business community has been calling for corporate tax reform for years, arguing that federal tax laws are inefficient, hurting their competitiveness. But none are stepping forward to give up the tax breaks that benefit them.
"We welcome the debate on tax reform," said Dorothy Coleman, vice president of tax and domestic economic policy for the National Association of Manufacturers. "The current tax system is a drag on economic growth and investment."