President Obama's plan to overhaul the nation's corporate tax system would sharply cut the taxes that U.S. companies pay. But it would also eliminate many of the loopholes that help them pare down what they owe.
White House spokesman Jay Carney says the proposal unveiled Wednesday should appeal to both Democrats and Republicans, by doing what both sides "say is important to do ... which is lower the rate, broaden the base [and] eliminate the underbrush of unnecessary subsidies and loopholes and special provisions that complicate the tax code."
But one phrase in Carney's statement reveals why the plan faces an uphill battle in Congress. "Broaden the base" means making more income, from more people, subject to taxation. And business lobbyists know that means eliminating popular tax breaks.
At least on paper, U.S. companies pay a tax rate of 35 percent — higher than almost any other advanced country. Tax Foundation President Scott Hodge says that rate leaves U.S. corporations at a big disadvantage.
"Seventy-five countries have cut their corporate tax rates. And if we look at the rest of the world, it's a very competitive place compared to the United States," Hodge says.
A Tax Code Loaded With Exemptions
But the U.S. tax code is also loaded with exemptions, deductions and credits of all kinds. And, says Bob McIntyre of Citizens for Tax Justice, most big companies know how to take advantage of them. "Right now we have about a 35 percent nominal corporate tax rate," he says. "But our big corporations, on average, pay about half that — about 18 percent."
The Obama administration's plan would cut the corporate tax rate to 28 percent, but it would also get rid of a lot of those loopholes. The plan would also impose a minimum tax on money that companies make overseas, something proponents say would cut down on the use of offshore tax havens.
Administration officials say a simpler tax code would save a lot of companies money. Joel Slemrod, professor of economics at the University of Michigan, agrees.
"Companies spend an enormous amount of money not just complying with the tax system, but planning ... how to make use of these complexities and the differences in tax systems across countries to their best advantage," he says.
To Hodge of the Tax Foundation, which lobbies for lower taxes, the effort to reform the system has come none too soon. "The administration should be given some credit for recognizing that the U.S. corporate tax rate is well out of step with the rest of the world and needs reform," he says.
But Hodge says the proposed tax cut doesn't go far enough. He also takes issue with a portion of the proposal that would cut the tax rate even further for manufacturers. Administration officials say they want to promote the creation of manufacturing jobs because they offer better pay and tend to lead to other kinds of job creation.
Picking Winners And Losers
But conservatives say the proposed boost to the manufacturing sector amounts to the government, rather than the market, picking winners and losers. The U.S. Chamber of Commerce warned that it would vigorously oppose efforts to pit one industry against another.
The idea is opposed by some liberal groups, as well. McIntyre of Citizens for Tax Justice notes that manufacturers already get big tax breaks.
"You take a company like Boeing, for example. ... Boeing hasn't paid a nickel in federal income taxes over the last 10 years. I don't know how you can cut their taxes any further. You really ought to be raising them," McIntyre says.
Such a move is unlikely to get through Congress in any case, particularly in an election year. Slemrod says hacking away at the thicket of tax credits and exemptions tends to be a tough sell in Washington — and lawmakers who try it quickly back down.
"In the past, anyway, the companies that pay more scream louder than the companies that pay less applaud," he says.
Still, there is widespread agreement that the tax code, with all its complexities and inequities, must be overhauled at some point — and that doing so would benefit the economy in the long run. The administration's proposal could set the stage for just such reform later on.