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Obama Backs Corporate Tax Cut If Won’t Raise Deficit

Tuesday, 25 Jan 2011 11:17 PM

 

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(Updates with Obama’s call for tax simplification in second-third paragraphs. For a special report, {EXTRA }.)

Jan. 25 (Bloomberg) -- President Barack Obama called on Congress to cut the top U.S. corporate tax rate for the first time in 25 years “without adding to our deficit,” signaling that businesses will have to give up cherished tax breaks in exchange for lower rates.

The president, in his State of the Union address to Congress tonight, also pressed for simplifying the tax system for individuals, which would restructure how more than $1 trillion in revenue is collected annually.

“The best thing we could do on taxes for all Americans is to simplify the individual tax code,” he said, to applause from the audience. “This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.”

Obama’s proposal for a corporate tax-rate decrease, accompanied by the removal of tax breaks, is at odds with that espoused by corporate chiefs. Robert McDonald, CEO of Procter & Gamble Co., and associations such as the Washington-based Business Roundtable have urged the administration and lawmakers to set aside deficit concerns for now.

Each percentage-point reduction in the 35 percent corporate tax rate could cost $8 billion or more a year in foregone revenue to the Treasury, according to the congressional Joint Committee on Taxation.

Corporate Rate Cut

Financing a rate cut could mean that corporate tax breaks such as a deduction for domestic manufacturing and production income and accelerated depreciation of capital expenses may have to be sacrificed.

“If it’s revenue neutral for businesses, there’s probably some winners and some losers,” said Daniel Shaviro, a professor of taxation at the New York University School of Law. “And when you take away a lot of special benefits, you tend to get losers complaining more than the winners celebrating.”

The top marginal corporate tax rate, or the rate paid on the last dollar of income earned, has stood at 35 percent since 1993. That year’s budget agreement raised the rate from 34 percent, where it stood since the 1986 tax-code overhaul lowered the top rate from 46 percent.

Companies often pay a lower effective tax rate, after taking advantage of tax credits and deductions and keeping overseas earnings reinvested indefinitely. The U.S. is among a handful of countries that tax profits earned in other countries, though only when the money is brought home, or repatriated.

‘Territorial’ System

Obama’s call to cut the top rate “will be highly welcomed by the business community,” though it ought to be paired with changing the way overseas profits are taxed, said Drew Lyon, a principal in the Washington national tax services office of PricewaterhouseCoopers LLP. He said Obama should endorse switching from a worldwide system of taxation to a “territorial” system, where companies’ overseas branches and subsidiaries pay tax only to their host governments.

“The rest of the world has made changes to their tax systems over the past 25 years and the U.S. has not, and as a result we’ve fallen behind,” Lyon said. “Any movement to try and match or move in the direction of our major trading partners will be to the advantage of U.S. companies and their workers.”

Deficit Reduction

A report by the Washington advocacy group Citizens for Tax Justice released before the speech said the goal should be to reduce the budget deficit, which was $1.3 trillion for the fiscal year ending Sept. 30. The report said Obama should follow President Ronald Reagan’s example in ending more corporate tax breaks than necessary to finance a rate cut. The group cited JCT estimates showing the 1986 law would raise corporate income taxes by $120.3 billion over five years, even after lowering the top rate.

The president in his speech also called for not making permanent Bush-era income tax cuts for individuals earning more than $200,000 and married couples earning more than $250,000.

The tax cuts enacted under President George W. Bush for all income levels were extended through 2012 as part of a deal Obama worked out with congressional Republican leaders in December. Obama agreed to the extensions for the upper brackets over the objections of Democratic leaders in Congress to win Republican support for a 13-month extension of unemployment benefits and extensions of tax credits for the working poor.

Obama asked Congress to make permanent a stimulus tax credit for higher education expenses, up to $10,000 for four years of college. That proposal was estimated by the JCT last year to cost $58.1 billion over 10 years.

--Editors: Jodi Schneider, Don Frederick

To contact the reporters on this story: Peter Cohn in Washington at pcohn@bloomberg.net; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net;

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

© Copyright 2014 Bloomberg News. All rights reserved.

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