White House pushes for corporate tax reform
Seeking to make the tax code fairer and more efficient, the Obama administration has proposed lowering the corporate tax rate and eliminating tax subsidies that benefit certain industries over others.
“Our business tax system is not just outdated. It is unfair and inefficient,” said Secretary of the Treasury Timothy Geithner. “The rate is high in order to pay for a tax code full of special benefits for certain industries and certain activities.”
As a result, the U.S. has one of the highest statutory corporate tax rates among developed nations. The U.S. statutory corporate tax rate stands at 39.2% (including federal and state corporate taxes), which is about 7% higher than the average tax rate charged by other G-7 countries, such as Canada, France, Germany, United Kingdom, and Italy.
A complicated & unfair tax system
The high tax rate combined with a complex tax code – consisting of various deductions, temporary subsidies, and other loopholes – have hindered overall U.S. competitiveness and economic growth.
In fact, top executives at FedEx and Time Warner Cable have recently testified before the House Ways and Means Committee in support of lowering the corporate tax rate down to 25% in exchange for simplifying the tax code by eliminating tax loopholes and subsidies.
“We advocate for a significantly lower rate, a simpler tax code, and predictable, consistent tax rules upon which business can make long-term decisions. We strongly believe that such changes would spur economic growth and create jobs in the U.S., increase American competitiveness and benefit American workers,” said Mark Schichtel, Senior Vice President and Chief Tax Officer of Time Warner Cable.
Obama’s business tax reform framework
The tax reform framework released by President Barack Obama last week offers broad recommendations to make the tax code fairer, simpler, more consistent and less burdensome for businesses. Some of the President’s proposals include:
- Lowering the overall corporate tax rate from 35% to 28%, which would bring the U.S. rate in line with the OECD average of 27.8%.
- Capping the manufacturing income tax rate at 25% with an even lower tax rate for domestic advanced manufacturing.
- Eliminating tax subsidies to oil and gas companies, including limiting how much the companies can write off for drilling costs and depletion of oil and gas wells, which often exceeds the cost of the property. (The more deductions companies can write off, the less taxes they have to pay.)
- Closing the “carried interests” tax loophole that have allowed hedge fund managers and investment partnership managers to pay only 15% for their labor income instead of the ordinary income rate between 15% to 35%.
- Eliminating special tax preferences for corporate jet purchases. The depreciation for corporate aircrafts will be treated the same as commercial aircrafts.
- Closing the life insurance loophole that have been used by large corporations as a tax shelter for their executives.
- Imposing a minimum tax for overseas earnings by American companies. The minimum tax would provide tax credit for foreign taxes paid. Under the existing tax code, overseas earnings are not taxed unless the money is moved back to the U.S. This loophole has encouraged U.S. companies to keep their earnings abroad or moved their earnings to offshore tax havens, like Bermuda and the Cayman Islands, to avoid paying U.S. taxes.
- Eliminating tax breaks for companies that ship factories and jobs overseas. Under the White House proposal, companies would no longer be allowed to deduct overseas relocation expenses that significantly reduce their U.S. tax obligations.
The President’s framework also offers tax incentives to help small businesses and high-tech manufacturers create jobs in the U.S. These incentives include:
- Offering a 20% relocation tax credit for companies that move jobs to the United States.
- Simplifying and making the research and experimentation (R&E) tax credit permanent. Currently, R&E tax credits are offered on a temporary basis and are subject to renewal. This uncertainty makes it difficult for companies to plan their research and development budgets, particularly for complex technologies that require long-term investments. The administration’s plan would propose a 17% flat tax credit for R&D purposes.
- Making the clean energy production tax credit permanent to encourage more investments in renewable energy technologies like wind and solar.
- Allowing small businesses to write off expenses of up to $1 million. If made permanent, this would encourage small businesses to grow their businesses by hiring more workers or investing in new equipments by reducing their tax obligations.
- Doubling tax deductions start-up costs from $5,000 to $10,000.
- Expanding health care tax credit to help small business pay for health insurance for up to 50 workers.
- Allowing simpler accounting – known as “cash accounting” – for small businesses with yearly gross revenues of up to $10 million.
The Center on Budget and Policy Priorities pointed out that the administration’s tax framework would do little to reduce the nation’s deficit in the long-run. “The framework’s main weakness is that it seeks no deficit-reduction contribution from corporate tax reform, aiming only for revenue neutrality,” wrote Chuck Marr, CBPP’s Director of Federal Tax Policy.
The Bipartisan Policy Center noted that Obama’s corporate tax reforms would unlikely become law this year.
- Treasury.gov: The President’s Framework for Business Tax Reform (PDF)
- Treasury.gov: Remarks by Treasury Secretary Tim Geithner (Feb. 22, 2012)
- Bipartisan Policy Center: How to Achieve Fundamental Tax Reform
- WaysandMeans.House.gov: Hearing on the Interaction of Tax and Financial Accounting on Tax Reform
- WaysandMeans.House.gov: Testimony of Mark Schichtel, Senior VP and Chief Tax Officer at Time Warner Cable, before the House Ways and Means Committee on Feb. 8, 2012 (PDF)
- WaysandMeans.House.gov: Testimony of Michael Fryt, Corporate Vice President at FedEx, before the House Ways and Means Committee on Feb. 8, 2012 (PDF)
- Center on Budget and Policy Priorities: Administration’s Corporate Tax Reform Framework a Promising Start but Falls Short on Raising Revenue