Obama Proposes Tax Revamp

February 22, 2012
Wall Street Journal
DAMIAN PALETTA And JOHN D. MCKINNON

The Obama administration will propose lowering the top income-tax rate for corporations to 28% from 35% but would raise overall tax revenue by eliminating dozens of popular deductions in an effort to restructure the corporate tax code.

The proposal, which will be announced Wednesday, would lower the "effective" tax rate on manufacturers to "no more than 25%," according to a senior administration official, down from the current average rate of about 32%. It raises taxes on oil and gas companies that would lose many large deductions and subsidies.

The plan would require U.S. companies operating overseas to pay—for the first time—a minimum tax rate on their foreign earnings.

Setting the stage for a debate with Congress and business groups over revamping the corporate tax code, the White House also will recommend simplified filing for small businesses, lowering their tax rates but potentially ending some of their breaks.

Under the plan, American businesses would pay more in aggregate, though some companies would pay more and some less than they do now, depending on the breaks they receive.

The administration's plan would raise an additional $250 billion in taxes over 10 years to offset or eliminate many temporary deductions, credits and other measures that are extended every year, such as a research and experimentation tax credit, a senior administration official said.

Other key details couldn't be learned Tuesday night, such as the exact treatment of large subsidies for manufacturers, the precise rate the White House wants to charge on overseas earnings and how the plan would affect companies structured so they don't pay the corporate income tax.

One theme of the proposal is offering new tax benefits for U.S. manufacturers while raising taxes on U.S. companies with large operations in other countries.

The proposal is subject to congressional approval, and its prospects are uncertain at best given partisan gridlock on Capitol Hill over tax policy and the closing window for legislative action during an election year.

But the White House sees a possible opening because many Republicans have said the tax code needs an overhaul, and both sides are aware they will be under pressure to reach some agreement at the end of the year when many temporary measures expire. A senior administration official said the U.S. business tax code was "uncompetitive, unfair, and inefficient," and in need of major changes.

Republicans already have objected to several White House proposals to end energy-industry subsidies. Some Republicans, speculating that the White House would propose lowering the corporate rate to 28%, have argued that level is too high.

"How can we create more jobs…if we tell the pass-through entities that their taxes are going to go up, if we tell the oil and gas companies that they're not going to be able to drill, and if we tell our corporate folks that we're only going to get to 28 apparently in the president's proposal [as the] corporate tax rate, and not even the average of what the world is at 25?" Rep. Pat Tiberi (R., Ohio) asked Treasury Secretary Timothy Geithner at a hearing last week.

"The effective tax rate on the energy industry in the United States today is much, much lower than the average," Mr. Geithner responded. "It's lower because the tax code provides a substantial amount of subsidies to those private companies. We propose, for lots of reasons, mostly because we think it's fair and more efficient, to dial some of those back."

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