February 23, 2012
Republican lawmakers lightly applauded the President’s efforts to get out in front of tax reform, but almost wholly denounced the plan he put forward Wednesday. Senate Finance Chairman Sen. Orrin Hatch dismissed Obama’s plan as “profoundly disappointing” for lacking details and failing to push the rate down to 25 percent. “After months of promises, we instead got a set of bullet points designed more for the campaign trail than an actual blueprint for fixing our tax code,” Hatch said in a statement.
Sheer number crunching shows a 25 percent rate is a mathematical pipe dream. A November analysis by the congressional Joint Committee on Taxation concluded that purging the code of all the business tax breaks—including the three categories the Obama plan retains—would only result in enough savings to cut the corporate rate to 28 percent if the plan were revenue neutral.
In fact, Obama administration officials said that while they would have liked to push the rate lower in the new plan, the math just didn’t add up to allow that. “The arithmetic is brutal on these calculations and really unforgiving,” an administration official said today. “We couldn’t really find a way to get much beyond that [28 percent] without incredibly deep cuts in things that folks normally think of as reasonable expenses and deductible expenses.”
By planning to tax firms that stash cash abroad, Obama essentially quashed hopes among business leaders and Republican lawmakers who favor the U.S. moving to a territorial tax system, whereby foreign earnings would be exempted from U.S. taxes. The current U.S. tax framework says foreign profits are taxed at U.S. rates once they are brought home, even though they were already taxed in the country in which they were earned.
The plan also makes no mention of a repatriation tax holiday, where multinational firms would be allowed to bring their overseas earnings back into the U.S. at dramatically lower tax rates than they can currently. However, administration officials told reporters that the White House has no intention of pursuing one. Firms like General Electric and Microsoft say such an initiative would spur them to shift that money stateside—which collectively adds up to $1.4 trillion.
Those two subjects drew particular ire from business groups, who say discounting those items discredits the plan. “The omission of a competitive territorial system combined with what appears to be major revenue increases – including proposed tax increases on American companies with worldwide operations – means the framework falls far short of a comprehensive modernization of the corporate tax system,” said John Engler, President of the Business Roundtable, a Washington business advocacy group. The U.S. Chamber of Commerce echoed BRT’s dismay. “We’re disappointed the White House proposal does not adopt a territorial tax system that would put an end to double taxation of profits earned by U.S. companies overseas.”
A separate gripe came from small business lobbying groups, who say they feel left in the lurch by the plan which eliminates many of the preferences they enjoy without lowering the individual tax rates they pay on their business income. “This framework helps big businesses but might have a major disadvantage for pass-through businessesm taking away the deductions they count on,” said Chris Walters, Senior Manager for Legislative Affairs for the National Federation of Independent Business. “How can they hire when that happens?”
The top U.S. corporate tax rate is currently 35 percent—the highest of any country besides Japan, and that will change in April when Japan is scheduled to cut its corporate rate by 2.5 percentage points. When state taxes are added to the mix in the U.S., the corporate rate soars to 40 percent. Yet few companies pay the full rate because of a convoluted system of tax write offs.