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A Framework for Business Tax Reform
Treasury Secretary Timothy F. Geithner unveiled President Obama’s framework for business tax reform at a news conference in Washington, DC on February 22. Geithner described proposals intended to reduce the corporate tax rate, eliminate many business tax preferences, encourage manufacturing, and more. The proposals outlined build on plans described in President Obama’s fiscal year (FY) 2013 budget proposal and in his January State of the Union address. Geithner told reporters that President Obama’s proposals “are designed to start the process of tax reform and this process will take time.”
“The president’s framework for reform has five key elements,” Geithner said. They are: eliminating tax loopholes and subsidies and broadening the tax base, and cutting the corporate tax rate; strengthening manufacturing; strengthening the international tax system; simplifying and cutting taxes for small businesses; and restoring fiscal responsibility.
Corporate tax rate
“The president’s framework recommends lowering the corporate tax rate from its current top rate of 35 percent to 28 percent,” Geithner said. He called a 28 percent rate “close to the average rate” among other major developed countries.
To achieve a 28 percent corporate tax rate, many business tax extenders and other business tax preferences would apparently be eliminated. Under current law, dozens of business tax extenders expired after 2011 or are scheduled to expire after 2012.
“Tax cuts do not pay for themselves,” Geithner said. “We have to ensure that those incentives Congress chooses to preserve as part of tax reform are paid for.” Geithner added that every tax preference that Congress chooses to preserve for some requires the rest of the business community to pay a higher rate.
A tax extender would need to show a broad “spill over” to the general economy to remain viable, according to high-level Treasury officials, who spoke to reporters after Geithner’s address. Examples of tax extenders with broad spill-over would be ones that impact research activities, manufacturing, and clean energy, the officials said.
President Obama has previously called for making the Code Sec. 41 research tax credit permanent, reforming and enhancing the Code Sec. 199 domestic production activities deduction, and enhancing several energy tax incentives. The officials echoed the president’s proposal to extend and enhance these incentives. They also repeated the president’s proposal to repeal a number of oil and gas tax preferences. Additionally, the framework would repeal the last-in, first-out method (LIFO) method of accounting, tax carried interest as ordinary income, and eliminate tax breaks for corporate jets.
“The convergence of U.S. Generally Accepted Accounting Principles (GAAP) and international financial reporting standards will have the effect of basically repealing LIFO,” David Sands, CPA, past chair, Relations with the IRS Committee, New York State Society of CPAs, told CCH. “Under the tax code, if you use LIFO for tax purposes, you must also use it for financial reporting purposes,” Sands noted.
“Today’s global economy provides strong incentives for companies to shift investments and profits to countries with low tax rates,” Geithner said. To discourage this, the administration has proposed a new minimum tax on foreign earnings. When asked to describe the minimum tax on foreign earnings, neither Geithner nor other Treasury officials provided details.
Discussing another international topic, a Treasury official reiterated the administration’s opposition to a repatriation tax holiday, such as the one enacted in 2004. “The administration remains opposed to an earnings repatriation tax holiday,” the official said. However, in a follow-up response, the official did not rule out the possibility that a repatriation holiday might be part of the legislative give-and-take as reform develops.
Reform of the Code Sec. 199 deduction and creation of unspecified new tax incentives are among the proposals targeted to manufacturers, Geithner said. “Tax reform should include strong incentives to encourage companies to create and build things in America,” he added.
Corporate tax base
The president’s framework would also reform the corporate tax base. Treasury officials described these proposals in very general terms. The proposals would address depreciation schedules, reduce what the administration calls a “bias” toward debt financing and establish “greater parity” between large corporations and large noncorporate counterparts.
No legislative language
Geithner said that the administration is not expecting to send legislative language containing its business tax reform proposals to Congress. “We want to use this framework to begin discussions (with Congress).”
If giving lawmakers more specifics would help advance the proposals, “that will be done,” Geithner noted. He also suggested that consideration of corporate tax reform might come toward the end of the year within the context of “difficult and far-reaching decisions” that Congress will be called to make in connection with expiration of the Bush-era tax cuts and deficit reduction.
Geithner reported that he had already spoken with the leaders of the House and Senate tax-writing committees. “We plan next week to begin the process on how to move forward,” he said.
White House statement
President Obama, in a written statement, noted that the current corporate tax system is “outdated, unfair, and inefficient” and that the business reform framework will simplify the tax code, eliminate tax loopholes and subsidies, and lower the corporate tax rate while broadening the base. He also noted that the framework includes a basic minimum tax on multinationals to ensure that companies are not rewarded for shipping jobs overseas.
“We need to eliminate a lot of the existing complexities from the tax code, and then identify very clearly what our priorities are when it comes to manufacturing, advanced manufacturing, and small businesses,” White House Press Secretary Jay Carney noted.
House Ways and Means Committee Chairman Dave Camp, R-Mich., who advocates a territorial tax system, noted that the administration’s proposal failed to address the need for comprehensive reform of the tax code.
“More than half of all business income is taxed at the individual, rather than corporate tax rates, and a corporate-only proposal does not address the needs of those job creators, the vast majority of which are small businesses. If we want to truly reinvigorate our economy and get Americans working again, we must address comprehensive tax reform,” said Camp.
The senior tax writer said he would continue to work with the White House to achieve those goals, saying the administration “will find a ready and willing partner in House Republicans when it comes to comprehensive tax reform that cuts rates to spur economic growth and job creation.”
Ways and Means Committee ranking member Sander Levin, D-Mich., said the administration has put the focus of corporate tax reform where it needs to be: “promoting investment, job creation and especially manufacturing in the United States, not overseas.”
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