The president's corporate tax plan can be the start of an important discussion

Tuesday, May 5, 2009

EXPECT President Obama's international tax proposal to set off a firestorm in Congress and the business community. The proposal, which will be released in more detail when the president's full budget comes out in the next few days, would alter tax rules so that companies are less able to shift profits to avoid U.S. taxation while also cracking down on tax havens for companies and individuals. In a speech yesterday, the president billed the plan as a revenue raiser, which it would be, and a plan to create jobs, a more contentious assertion.

Corporate tax policy is certainly in need of reform. The United States has the second-highest corporate tax rate in the world, though at just over one-tenth of the budget, the overall share of revenue it raises is remarkably small, both because the corporate tax base is chopped up by so many deductions, exemptions and credits, and because larger companies have great flexibility in shifting their profits around the world to lower their tax bills. In December, the Government Accountability Office reported that 83 of the nation's 100 largest companies have subsidiaries in tax havens, with Citigroup, Morgan Stanley and News Corp. (think Fox News) leading the way, each with more than 150 subsidiaries in tax haven locations. Many companies have legitimate business in these places, and many that are there solely to minimize their tax bills are doing so legally. Still, there is ample room for tax streamlining, given, for instance, the imbalance between domestic companies that are not able to shift profits and multinationals that can to some extent pick and choose where they pay taxes. Additionally, it's good to see the administration looking for revenue to promote investment and reduce the deficit.

However, some of the changes the administration is contemplating could harm U.S. competitiveness. Higher tax burdens would put U.S. corporations at a disadvantage compared with foreign competitors that do not face the double tax regime to which some corporations would be subject. The administration cited numbers showing that in 2004, U.S. multinationals paid $16 billion in taxes on $700 billion in foreign earnings, but it did not mention the $120 billion in foreign taxes they paid that year. Trade groups will argue that the increased cost of doing business will lead to job losses in the United States, not the gains promised by Mr. Obama.

The corporate tax code is a mess -- the rates are too high and the complexity extreme. One promising approach would be to pair the types of reforms the administration is talking about with a reduction in the overall rate, which would be advantageous for both multinational and domestic companies -- though, of course, it would reduce the amount of revenue that would be raised as a result of the policy. While it was never a centerpiece of his campaign, Mr. Obama supported reducing corporate income tax rates during his run for the presidency as long as it was done in a revenue-neutral manner. This proposal could be a way to get that broader discussion of corporate tax reform started.

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