Washington News

On February 22, Treasury Secretary Timothy Geithner spoke to Congress and outlined the White House proposal for corporate tax reform. Geithner noted that there has not been a comprehensive corporate tax reform for 25 years. Since the last major corporate tax reform, there have been many significant events. These include the following changes.

1. Internet is widely used.

2. Cell phones are now commonplace.

3. China and India have become significant economies.

4. Global trade has greatly expanded.

5. Nearly all other industrial societies have lowered their corporate rates.

There are five major elements in the White House proposed reform.

1. Reduced Rates – The elimination of tax loopholes and subsidies will permit a reduction of the corporate tax rate from 35% to 28%.

2. Manufacturing Incentives – The effective tax rate for manufacturing companies will be reduced to 25% through incentives.

3. International Taxation System – Companies could pay penalties for shifting income overseas.

4. Simplification – Small businesses would benefit from reduced complexity in the Tax Code.

5. Revenue Neutrality – The reduced rates are achieved through eliminating various tax deductions.

Treasury Secretary Geithner indicated that he plans to meet with Senate Finance Chair Max Baucus (D-MT) and House Ways and Means Chair Dave Camp (R-MI). He hopes that it will be possible to build a bipartisan consensus for corporate tax reform.

Editor's Note: Sen. Baucus and Chairman Camp have been holding hearings and proposing corporate tax reform for the past year. With the White House announcement, it appears that the President, the House and the Senate agree that there should be simplification and a lower corporate top rate. The challenge will come when the government grapples with the question of which major corporate deductions (such as bonus depreciation) will actually be removed in order to lower rates. Because of the magnitude of major tax reform, it is not likely that an actual bill could be passed before 2013.

Congress Welcomes Debate on Tax Reform

In response to the White House, many members of Congress welcomed the debate on tax reform.

Both the House Ways and Means Committee and the Senate Finance Committee have held multiple hearings on tax reform. At the hearings, witnesses observed that the United States has an average state and local tax rate on corporations of up to 39%. This is approximately 15% higher than the average rate of other industrial countries.

Since 2000, most of the other major industrial countries have reduced tax rates from 5% to 15%. The reduced rates are designed to make the companies competitive in a global economy and to retain jobs at home. Because the U.S. has a high corporate tax rate, there is an incentive for companies to move jobs overseas.

Democratic leaders were supportive of the President. Rep. Nancy Pelosi (D-CA) stated, "President Obama's proposal presents a clear opportunity to work in a bipartisan manner to lower tax rates on American businesses and corporations while closing loopholes for Big Oil and companies that ship jobs overseas."

The Ranking Member on the House Ways and Means Committee is Rep. Sander Levin (D-MI). He "applauded" the President for setting forth a series of goals for corporate tax reform. Levin noted, "The Administration has put the focus of corporate tax reform where it needs to be: on promoting investment, job creation and especially manufacturing in the United States, not overseas."

Republican leaders were generally pleased that the White House had issued a proposal. However, they expressed hope that there would be more specifics to the Treasury plan. Ranking Member of the Senate Finance Committee Orin Hatch (R-UT) noted that the major tax overhaul signed by President Reagan in 1986 was the result of "three long years" of effort. The actual major overhaul of corporate and personal taxes together is a huge undertaking.

Hatch stated, "America's tax system is broken to the point that it's putting our nation at a competitive disadvantage around the world. I'd hoped the White House would recognize the severity of the problem with a real plan and real leadership." Sen. Hatch called the proposal "profoundly disappointing in its lack of detail." He hopes that the White House and Treasury Secretary Geithner will work with the Republicans on a meaningful tax reform. He indicated that this level of effort would find "willing and able partners in Congress."

A key member of Congress for tax reform is the Chairman of the House Ways and Means Committee, this committee is required to initiate all major tax legislation. Chairman Dave Camp (R-MI) noted that he appreciated the White House proposal. Camp stated, "There is a clear and growing consensus that our outdated tax code is hindering the job creation this country needs to get Americans back to work and it must be reformed so that the United States would be a more attractive place to invest and hire."

Camp and Sen. Ron Wyden (D-OR) also expressed a bipartisan concern that it is not possible to have major corporate tax reform without also reforming personal income taxes. Camp noted, "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."

Wyden has previously been involved in bipartisan tax proposals. He agreed and stated, "Right now, more than 80% of all U.S. businesses are filing their taxes through the individual tax code, not the corporate tax code. Those businesses would see little benefit from this proposal."

Editor's Note: It is positive that the House and Senate tax writers and the White House have all published proposals. If Sen. Wyden and Chairman Camp persuade Congress that tax reform must include both corporate taxes and personal taxes, then the process will be quite extensive. However, there is general agreement that broadening the tax base through reducing deductions and reducing rates at the same time will be beneficial.