WASHINGTON -- Treasury Secretary Timothy Geithner unveiled President Obama's business tax plan this morning that would lower the corporate tax rate from 35% to 28% while slashing popular tax breaks enjoyed from Wall Street to Main Street.
The plan would make up lost revenue as a result of lower rates by eliminating tax loopholes and simplifying a business tax system that an administration statement called "uncompetitive, unfair, and inefficient."
Among the endangered loopholes from what the Obama administration calls a "menu of options" is the current accelerated depreciation schedule that encourages business investment. "It comes at the cost of higher tax rates for a given amount of revenue," the plan states.
"By getting rid of special preferences for special types of activity and specific industries, we can reduce distortions that hurt productivity and economic growth, permitting us to lower corporate tax rates in a fiscally responsible way," Geithner said.
President Obama would retain and make permanent one popular break: the tax credit for research and experimentation. But the plan would require that any corporate tax breaks retained by Congress be paid for. Currently, those breaks add about $25 billion a year to the deficit.
The plan calls for lowering the tax on manufacturing to 25%, even lower for "advanced" manufacturing activities. It would require companies to pay a minimum tax on overseas profits. And it would allow small businesses to expense up to $1 million in investments.
The "framework for business tax reform" is designed to "enhance American competitiveness by simplifying the tax code and eliminating dozens of loopholes and subsidies; incentivizing job creation and investment here at home; and lowering the business rate while broadening the tax base," according to an administration statement.
Some Republicans denounced the proposed corporate tax cut as nothing more than an election-year ploy.
"Time and again President Obama shows us his every move is determined by his re-election campaign and has nothing to do with principle," said Kirsten Kukowski, spokeswoman for the Republican National Committee. "How else can you explain his sudden desire to talk corporate taxes after three years of failed economic policies?"
But the Treasury Department has been working on corporate tax reform for two years, and the decision to roll it out now -- but without Obama's direct involvement -- indicates a desire to take on a difficult issue without being overly specific.
Very few tax loopholes were singled out for elimination, including some Obama has cited before such as tax breaks for oil and gas companies, hedge fund managers and owners of corporate aircraft.
More expensive and widely used tax breaks, such as accelerated depreciation and reducing the deductibility of interest for corporations, are mentioned but not insisted on. However, the plan notes several of the costlier breaks would have to be wiped out to get the rate down to 28% without raising the deficit.
"The president's proposal is designed to start the process," Geithner said. "This process is going to take time. It will be politically contentious. Some are going to say these proposals are too tough on business, and others will say they're not tough enough."
Officials said they didn't go further -- say, to 25%, as Mitt Romney has proposed -- because they could not cut enough loopholes to pay for it within the corporate tax system. Newt Gingrich has proposed a 12.5% rate. Rick Santorum wants to exempt domestic manufacturers and cut the top rate in half for others.
The plan has five elements, according to the administration:
1. Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America: The framework eliminates dozens of different tax expenditures and fundamentally reforms the business tax base to reduce distortions that hurt productivity and growth. It reinvests these savings to lower the corporate tax rate to 28 percent, putting the United States in line with major competitor countries and encouraging greater investment.
2. Strengthen American manufacturing and innovation: The framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.
3. Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment: Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base. Introducing the principle of a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates.
4. Simplify and cut taxes for America's small businesses: Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns.
5. Restore fiscal responsibility and not add a dime to the deficit: Business tax reform should be fully paid for and lead to greater fiscal responsibility than our current business tax system by either eliminating or making permanent and fully paying for temporary tax provisions now in the tax code.
USA Today