What's next for tax code? Geithner discusses overhaul with wide range of groups

By Brady Dennis
Washington Post Staff Writer
Thursday, February 3, 2011; 8:25 PM

Timothy F. Geithner can't seem to talk enough these days about corporate tax reform. From D.C. to Davos, the Treasury secretary has chatted up chief executives and academics, bankers and labor groups, Republicans and Democrats, all in the name of fixing a tax code that most everyone agrees could use a major overhaul.

What remains unclear is whether the Obama administration actually intends to push for meaningful changes to the corporate tax code this year, or whether political obstacles will relegate Geithner's campaign to a mere plank in President Obama's new business-friendly platform.

Over the past few weeks, Geithner has met on multiple occasions with corporate leaders and others with a stake in the debate, with the aim of building support for the administration's proposal to dramatically reduce the 35 percent corporate tax rate while closing windows in the tax code that permit many corporations to pay much less.

Some of those who attended the powwows have left with the impression that little real action lies ahead.

"All this talk about tax reform is happy talk," said one participant, who spoke on the condition of anonymity because the Treasury Department asked guests not to discuss the private meetings. "This is a way for them to talk about something the business community cares about, but it's not for real."

Others, however, see an administration determined to pursue real changes.

"I think they're committed to trying to get tax reform done," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, whose members have met with Geithner and members of Congress on the topic. "Their tone, their body language, their approach - everything they're doing leads me to believe they're serious."

Since the beginning of the year, Geithner has taken the temperature of a wide range of groups with an interest in changing the corporate tax code. There have been meetings with executives from Wal-Mart, Exxon Mobil and Caterpillar; with think tanks as disparate as the conservative American Enterprise Institute and the liberal Citizens for Tax Justice; with advocacy groups such as the Business Roundtable and the AFL-CIO; and even with Bill Bradley, the former New Jersey senator who helped engineer the last major overhaul of the tax system in 1986.

In his recent State of the Union address, Obama issued an explicit call for a tax overhaul, saying it makes no sense that some companies and industries can end up paying no taxes while others are "hit with one of the highest corporate tax rates in the world." He called on lawmakers to "level the playing field" by lowering the tax rate and eliminating loopholes.

At 35 percent, the U.S. tax on corporate profits has become one of the highest in the industrialized world as other nations have steadily cut corporate rates. The U.S. business community has been calling for years for a reduction, arguing that the higher rate discourages domestic investment and encourages companies to locate operations overseas.

However, many companies already pay a much lower effective tax rate, thanks to a spectrum of deductions and credits with which they would be reluctant to part. Multinationals, in particular, benefit from the current code, which allows them to defer taxes on profits earned abroad unless and until they bring the money home to the United States.

Republicans are pressing for adoption of a "territorial" tax system that would tax only profits earned domestically, the system in effect in virtually every other developed country. But such a move is likely to face opposition from smaller domestic companies, as well as from many Democrats who argue that such a system would encourage the largest firms to outsource U.S. jobs.

Further complicating efforts: Many businesses are not organized as corporations at all and therefore do not pay corporate taxes. Instead, they pay taxes on their profits under the individual tax code. Obama has ruled out an overhaul of the individual tax code for now, because it is likely to require him to break his campaign promise not to raise taxes on Americans who earn less than $250,000 a year. But Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, has said he would prefer a global tax overhaul that tackles both parts of the code and reduces tax rates for businesses of all sizes.

The administration has placed other constraints on the debate. For example, Obama and Geithner are advocating that corporate tax changes remain "revenue neutral," meaning they would shift the tax burden among corporations without increasing or reducing overall federal tax collections.

Despite a consensus on the need for change, many observers see little chance of such legislation getting through Congress anytime soon.

"The constraints are too tight. . . . There's not unanimity on how you would get there," said Douglas Holtz-Eakin, former director of the Congressional Budget Office and now president of the American Action Forum. He said overhauling just corporate taxes would be tough under the best circumstances, let alone with a divided Congress and huge budget and deficit problems looming.

University of Michigan law professor Michael Barr, a former assistant Treasury secretary under Obama, said that many industries are wedded to the current tax structure and that any changes would create clear losers, while the benefits of changing the code are likely to be diffused throughout the economy.

Still, he said, that doesn't mean it's not worth trying.

"They are serious about it. They are really going to push hard for it," he said of the administration. "Conceptually, people say there's agreement. When push comes to shove, we'll see who in Congress is willing to take it on."

Staff writer Lori Montgomery contributed to this report.

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