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.
(GRAPHIC: Charts showing the low effective tax rates paid by many of the largest and most profitable U.S. corporations.)
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“Our current corporate tax system is outdated, unfair and inefficient,” he said.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.
“It’s official: President Obama, congressional leaders of both political parties and the Republican candidates for president all support lowering corporate tax rates,” said John Engler, president of the Business Roundtable, a top industry trade group. “Now let the debate begin.”
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. He had previously called for a deeper corporate tax-rate cut, to 25 percent, which is the same as proposed by a key House Republican.
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.
Engler, as well as Thomas Donohue, president of the U.S. Chamber of Commerce, criticized Obama’s plan for not lowering taxes on foreign earnings. Both industry groups want corporate profits abroad to be taxed only by the country in which they are earned. The U.S. now taxes those earnings when they are brought back to the country.
Obama rejected that idea.
Instead, he proposed a new minimum tax rate for foreign earnings that companies would be required to pay even if they did not bring those profits back to the U.S. That provision is part of Obama’s effort to use the corporate tax code to provide incentives for domestic manufacturing while reducing the tax advantages for companies to build facilities overseas.
His plan, so far, doesn’t specify what that new minimum rate on foreign earnings would be, one of many details the administration is leaving to Congress.
Through the expansion of some widely used breaks, such as one for research and development, the administration wants to reduce the overall rate that domestic manufacturers pay — known as the effective tax rate — to no more than 25 percent from the current 32 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, including a permanent tax credit, now temporary, for the production of electricity from renewable sources.
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.