Obama's Corporate Tax Plan Begins to Take Shape

Feb 27th 2012
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By Ken Berry

The battle lines are being drawn. Last week, President Obama unveiled the framework for an extensive corporate tax package. It didn't take long for his rivals to poke holes in the plan. In fact, the Republican front-runner for the presidency, Mitt Romney, chose the very same day on the campaign trail to present his own economic program. 

At the core, the Obama reforms emphasize the need to simplify the tax code, while eliminating the preponderance of loopholes, special deductions, subsidies, allowances, and exceptions.

"Our current corporate tax system is outdated, unfair, and inefficient. 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. It is unnecessarily complicated and forces America's small businesses to spend countless hours and dollars filing their taxes. It's not right, and it needs to change", said the president in a written statement.

The centerpiece of the Obama plan is a deep cut in the top tax rate for corporations, from 35 percent to 28 percent. This proposal addresses a long-standing complaint that the tax rate is too high for US companies to fairly compete in the international marketplace. Among other developed countries, only Japan has a higher corporate tax rate.

But it's questionable if large US companies are actually paying their fair share slice of the income tax pie. According to two nonprofit groups, the Citizens for Tax Justice and the Institute on Taxation and Economic Policy, a quarter of the 280 biggest and most profitable U.S. companies paid less than 10 percent in taxes over the three years spanning 2008 through 2010. 

In addition to the corporate tax cut, the president outlined in broad terms other proposed changes, including the creation of a new minimum tax on earnings abroad to encourage business investment at home, the end of certain tax preferences and other loopholes for the oil and gas industries and multinational corporations, and the imposition of a 25 percent effective cap on the tax rate for domestic manufacturers. He wants to stack up the "winners" against "losers" in the corporate tax package so the outcome is revenue-neutral.

Although specific details aren't available yet, it's been estimated by the Obama administration that the tax benefits for businesses would add approximately $250 billion to the federal budget over the next decade, but they would be offset by $250 billion in new revenue. By implementing this plan, argues the Obama camp, corporations will be able to rely on tax provisions remaining in place, allowing them to do long-range planning.

The president didn't offer any more insights into a potential extension of Bush-era tax cuts for individual taxpayers. Currently, those tax breaks, which include a maximum 15 percent tax rate for long-term capital gains and qualified dividends, are set to expire after 2012.

In recent speeches, candidate Romney has proposed an across-the-board reduction of 20 percent in the marginal tax rates for individuals, the elimination of taxes on capital gains and dividends for families making less than $200,000, an even steeper reduction in the corporate tax rate from 35 percent to 25 percent, and a gradual increase in eligibility requirements for Medicare and Social Security for wealthy Americans.

The political climate being what it is right now, it's extremely doubtful that any significant tax reform will be enacted before November. After the election results are in, you can expect the candidate-elect's tax proposals to be put back on the table.

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