The Obama administration has unveiled a framework for corporate tax reform that lowers rates while eliminating loopholes, but the proposal has already met with sharp criticism from Republicans and corporations for proposing a rate higher than the developed country average.
The administration’s five-point plan lowers the corporate tax rate from 35% to 28%, while eliminating tax expenditures, special provisions in the tax code that favor certain corporate sectors but which reduce revenue to the government. At the same time, the administration proposes to introduce incentives for U.S. manufacturers that cap the effective rate of that sector to no more than 25%.
Additionally, the plan would impose a minimum tax on foreign earnings, which the administration says will encourage U.S. companies to invest in the domestic economy. The administration says its proposal would also reduce the tax burden on small businesses. Finally, the plan is meant to be cost neutral, meaning that the closing of tax expenditures are expected to make up for revenues lost through a lower overall rate.
Treasury Secretary Tim Geithner, in prepared remarks introducing the plan, said: “We want to restore a system in which American businesses succeed or fail based on the products they make and the services they provide, not on the creativity of their tax engineers or the lobbyists they hire.”
White House Press Secretary Jay Carney, speaking to reporters on Wednesday afternoon called on Congress to take action “in accordance with the president’s principles.”
But Senate Finance Committee ranking member Orrin Hatch (R-Utah) poured cold water on that possibility, calling the president’s plan “profoundly disappointing in its lack of detail” and taking further aim at elements of the plan that were specified.
“Last Fall, Republicans on the Senate Finance Committee proposed reducing our corporate tax rate to 25 percent and moving to a more efficient territorial tax system,” Hatch stated in a news release. “Instead, the Administration today only reduces the corporate rate to 28 percent and retains the antiquated worldwide system of corporate taxation. Instead of simply reducing and eliminating tax preferences, the Administration proposes more.”
Hatch also criticized a “so-called reform that includes a back door tax increase” and added that tax reform should address individual taxpayers as well as corporations.
Geithner’s remarks seemed to anticipate this criticism, saying the proposal was “designed to start the process of fundamental tax reform.”
“Some will say these proposals are too tough on business, and others will say that they’re not tough enough,” Geithner added. “Many will fight to preserve specific tax preferences and subsidies, but every preference Congress preserves for some requires the rest of America’s businesses to pay a higher rate.”
Among those coming out against the proposal is the RATE Coalition, a bipartisan group of multinational businesses that has been lobbying for corporate reform. The group, which says its 26 corporate members employ 30 million Americans in all 50 states, says the administration plan is unlikely to restore competitiveness and boost job creation by maintaining a tax rate that is higher than the 25% OECD average while raising taxes, the coalition says, by $250 billion.
The coalition’s co-chairman Elaine Kamarck, a former advisor to President Bill Clinton and Al Gore, urged the administration to “take further steps to reduce the outdated corporate income tax rate, and to take these steps this year.”
In his announcement on Wednesday, Geithner said the U.S. “corporate tax rate is now on pace to become the highest among all developed economies,” which is set to occur on April 1 when Japan officially lowers its rate.
Martin Sullilvan, contributing editor of Tax Analysts, commenting on the administration proposal and congressional response, cautioned that Americans should not expect the plan to see the light of legislation any time soon:
“The President deserves high grades for a much-needed reduction in the corporate rate. And a blanket rule preventing multinationals from parking profits in tax havens is long overdue,” Sullivan said.
“But by only suggesting–and not spelling out exactly and endorsing–what other tax breaks could pay for the low rate, he has left the hard part of tax reform undone. Unfortunately, most other advocates of corporate tax reform also are refraining from specifics when it comes to revenue-raising. Consequently, we are only at the starting point of corporate tax reform, and the road is a long one,” he added.