Reconsidering Corporate Tax Breaks

Ending Some Preferences Could Cut Rates, Help U.S. Compete, Treasury Says

Treasury Secretary Henry M. Paulson Jr. hopes to open a dialogue about streamlining regulations and taxes to help U.S. companies better compete in the global economy. (By Eugenio Savio -- Associated Press)

The federal government could cut the corporate tax rate significantly without sacrificing revenue by eliminating an array of popular but narrowly targeted tax breaks such as the research-and-development tax credit, according to a Treasury paper released yesterday.

Savings generated by scrapping the credit, along with a deduction for domestic production, breaks for interest on state and local bonds and other special tax preferences, would allow the government to cut corporate rates to 27 from 35 percent, the paper says, making U.S. businesses more competitive globally.

Alternatively, the government could let businesses immediately write off 40 percent of the value of new investments.

The paper concludes that "revenue foregone from the existence of corporate tax preferences comes at a significant cost to economic efficiency." But Treasury Secretary Henry M. Paulson Jr. said in an interview that the paper is not intended to state a position so much as to open a public discussion about how to streamline taxes and regulations to help U.S. companies compete.

"The first step, at least for us here, is to raise the question: Are we taxing business in the right way to be globally competitive?" Paulson said. "Let's build a broader consensus that that is an issue and go from there."

The next step comes Thursday, when Paulson hosts a conference on business taxation featuring economic luminaries Alan Greenspan, former chairman of the Federal Reserve; National Bureau of Economic Research President Martin Feldstein and top executives of Caterpillar, FedEx and Oracle.

Asked whether policy directives are likely to emerge from the meeting, Paulson said he was "not ruling anything out." But, he said, "This is really the early days."

The U.S. corporate tax rate, including state levies, is 39 percent, the Treasury said. That is the second-highest rate among the 30 member states in the Organization for Economic Cooperation and Development, trailing only Japan. As other developed countries have lowered their tax rates, the United States has been transformed from a relatively low-tax country in the mid-1980s to a relatively high-tax state.

Many countries are contemplating further reductions. Germany is expected to cut its rate to 30 from 38 percent next year. France, Japan and Britain have signaled that tax cuts may be in the works. And China, one of the United States' most important competitors, has approved legislation to cut its rate to 25 percent.

Those developments have prompted calls for a re-examination of U.S. tax policy. Paulson has responded by arranging Thursday's conference and by writing a commentary that appeared in the Wall Street Journal last week titled "Our Broken Corporate Tax Code."

"Maintaining our competitiveness in today's global environment requires us to think comprehensively and act prudently," Paulson wrote. "As Europe's biggest economies and developing nations around the world move to reduce corporate taxes and gain the benefits for their workers that U.S. workers already enjoy, now is an opportune time, when our economy is in a position of strength, to consider ways our business tax system can be improved."

Paulson's commentary and the paper released yesterday list a variety of options for improving competitiveness. In addition to eliminating narrow tax preferences in favor of a lower overall corporate rate, they include re-examining the multiple layers of taxes the United States imposes on corporate profits as well as the top tax rates the government imposes on individuals.