Obama Wants Lower Tax Rates, Fewer Deductions, More Revenue Overall

Obama Wants Lower Tax Rates, Fewer Deductions, More Revenue Overall
February 22, 2012

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

U.S. businesses would have a lower tax rate but an overall higher tax bill under a proposal by President Barack Obama.

Obama proposes to lower the corporate tax rate from 35 percent to 28 percent while at the same time ending dozens of tax deductions. Businesses would end up paying tax on a larger amount of taxable income. Result: a higher aggregate business tax bill.

The president also proposes to force U.S. companies with overseas operations to pay a minimum tax on their overseas earnings. U.S. businesses with overseas operations currently pay tax only in the jurisdiction where the income is earned, if the money stays overseas.

The president would simplify and lower tax rates on small businesses but also take away some small business deductions.

Oil, Gas Hit Hard

Some businesses would pay more and others less, depending on what tax deductions they use and would lose. The oil and gas industry likely would pay substantially more, as many industry tax breaks would end. But “green” energy would be boosted.

“In order to make us more competitive and create jobs here at home, we must reform our corporate tax code,” Treasury Secretary Tim Geithner said in a statement. “The President’s framework would boost growth and provide American companies with incentives to invest in the U.S. while simplifying and cutting taxes for our small businesses.”

The plan states, “The tax code currently subsidizes oil and gas production through tax expenditures that provide preferences for these industries over others. The Framework would repeal tax preferences available for fossil fuels.”

Retailers Not Buying

The retail industry pays one of the highest effective tax rates, as it has few tax deductions, and many owners of small stores pay their taxes using the individual rate, which tops out at 35 percent.

“While we applaud the president for recognizing the urgent need for reform and stepping forward with a corporate tax reform plan, today’s proposal falls short of the bold reforms that are sorely needed,” said Katherine Lugar, executive vice president for public affairs for the Retail Industry Leaders Association. “With 12.8 million unemployed Americans looking for work, comprehensive tax reform that spurs investment and job creation can’t come soon enough, but if it’s worth doing, it’s worth doing right.”

RILA especially disapproved of aspects of the proposal that “use the tax code to pick winners and losers.” While calling for ending many tax deductions, the president also calls for special breaks for U.S. manufacturers to take their corporate tax rate down to 25 percent.

Picks Winners, Losers

“Unfortunately,” said Lugar, “the president’s proposal preserves special preferences that give some industries advantages at the expense of others. Further, the administration’s plan effectively maintains the taxation of international income, a harmful policy that is increasingly unique to the United States.”

The National Retail Federation was more supportive, though the organization maintains more needs to be done.

“The President’s proposal is a significant step forward, and we hope the administration will work closely with those in Congress who have proposed going even further,” said NRF President and CEO Matthew Shay. “Tax reform is a once-in-a-generation opportunity and we need to get it right. Reform needs to address small businesses as well as corporations, and needs to be fair to all industries rather than favoring one over another.”

Liked on the Left

The Center for American Progress has supported much of the president’s agenda, including a minimum tax on overseas income earned by U.S. corporations.

 “The White House has laid out a roadmap for corporate tax reform that is aimed exactly where it should be: on strengthening the U.S. economy for the benefit of the nation as a whole,” said Michael Ettlinger, CAP vice president for economic policy. “It is a serious first step toward overhauling the corporate tax code in a way that enhances growth and job creation in the United States.”

Ettlinger said the tax reform would strengthen the middle class and improve the government’s long-term fiscal outlook, a reference to the estimated $250 billion of additional income over 10 years the government would take in.

“Our existing corporate tax code is a mess. It rewards companies for moving investments offshore, for taking on excessive debt, and for hiring armies of lawyers and accountants to game it,” Ettllinger said. “The White House is proposing a substantial improvement: A tax code that actually rewards companies for investing and hiring in the United States. While eliminating dozens of loopholes, the proposal reorients the incentives embedded in the tax code toward domestic investment, specifically on the investments in R&D, manufacturing, and new energy technologies that drive economic growth.”

Seen as Anti-Competitive

The American Chemistry Council gave a decidedly different evaluation:

“The president has said he wants America to lead the world in manufacturing, and we strongly support that goal,” said Cal Dooley, ACC president and CEO.  “Getting there will require a fair, simple tax system that allows U.S. companies to compete evenly abroad. 

“Unfortunately, today’s proposal falls short. It creates a new structure in which tax credits are not valuable enough to maintain and grow domestic manufacturing. The new tax on foreign income would doubly tax U.S. companies that have become global leaders – a very anti-competitive proposal. Meanwhile, higher taxes on oil and natural gas companies could inhibit domestic energy production just as new supplies are helping U.S. manufacturers grow and create jobs.”

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)