WASHINGTON – President Barack Obama’s proposal to lower the corporate tax rate to 28 percent from 35 percent shows a growing consensus in Washington that many companies need to pay less in taxes for the U.S. to stay competitive globally.
But exactly how to do that – and which companies should pay more to make up the difference – remains elusive in a volatile election year.
Democrats and Republicans have starkly different ideas about how far to lower corporate tax rates and whether changes to individual tax rates, including the Bush-era cuts that expire at the end of the year, should be part of the reform debate.
Obama laid down his marker Wednesday with a 23-page framework for a plan to eliminate dozens of breaks for specific industries, particularly oil and gas production, and new incentives for domestic manufacturing and alternative energy.
“Our current corporate tax system is outdated, unfair and inefficient,” he said. “It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world.”
Key Republicans welcomed Obama’s call for a lower corporate rate. But they said his proposal wouldn’t reduce the rates enough and that his broad framework needed much more detail.
The GOP also wants to tackle corporate and individual taxes at the same time, laying the groundwork for a nasty and complex battle this fall as Republicans fight to save all the Bush tax cuts. Obama wants to let the tax cuts expire for households making more than $250,000 a year.
Legislative action on taxes probably will have to wait until after the November elections because the topic is tightly intertwined with key campaign issues, including how best to boost job creation, how to limit the growing size of government and whether large corporations and wealthy individuals are paying their fair share.
Highlighting the political stakes, Republican presidential candidate Mitt Romney chose Wednesday to release a tax plan of his own, one that called for slashing individual rates by one-fifth. Other Republican presidential candidates want to go further. Rick Santorum is calling for a 17.5 percent corporate rate, and Newt Gingrich wants it to drop to 12.5 percent.
The administration’s tax plan would not add to the budget deficit because the elimination of dozens of existing breaks would raise an additional $250 billion over the next 10 years, enough to offset the cost of the lower rate and a smaller set of targeted tax breaks.
The administration wants to get rid of several oil and gas industry tax breaks, such as the ability to write off certain costs related to drilling and the use of wells. Offsetting those cuts would be an expansion of tax incentives for alternative energy investment.
The plan also would eliminate a tax break for hedge fund managers, private equity partners and other managers in partnerships. Most of their pay, known as carried interest, now is subject to a capital gains tax of 15 percent. Under Obama’s plan, that income would be taxed at their ordinary income level, which could be as high as 35 percent.
Obama’s proposal tries to spur U.S. manufacturing and innovation by focusing and expanding a domestic production tax break on manufacturing.
A current research-and-development tax credit would be expanded, simplified and made permanent.
Small businesses would see their taxes cut and simplified with changes that would allow them to write off the cost of certain investments, up to $1 million, the White House said.