President Obama’s budget proposes to cut corporate taxes by getting rid of loopholes.
President Obama’s 2012 budget looks to cut corporate taxes by lopping the loopholes that the administration says creates an uneven playing field and makes the US corporations less competitive.
“Now more than ever,” the president wrote in his opening budget message, “when we want to compete and win in the world economy, we cannot afford a tax code burdened with special interest tax breaks.”
As most everyone knows, US corporations pay one of the highest tax rates in the world – 35 percent – which critics say puts US companies at a competitive disadvantage. Japan has a higher rate at 40 percent, but most countries average in the mid- to low 20s. Ireland has a tax rate of 12.5 percent. For the US, Mr. Obama blames tax breaks and loopholes that favor certain industries for the US’s high rate. (Word of note: in the current 2012 budget, Mr. Obama mentions the word “loophole” 11 times. For the 2011 budget it was 13 times. In 2010, he mentioned it 9 times).
One of the areas where Mr. Obama proposes to start the loophole lopping is in the oil patch and among other energy concerns. The president plans on eliminating 12 tax breaks for oil, gas, and coal companies, in hopes of raising nearly $46bn over the next decade. Big Oil for one will fight this as they already pay well over the 35 percent tax rate. According to data from Thomson Reuters, Exxon and Chevron both paid almost 40 percent in taxes on average over the past five years.
According to the Tax Foundation, only about 20 percent of the tax benefits that Mr. Obama refers to are “targeted” to specific industries or sectors while roughly half of them are, for the most part, available to all companies. Oil and gas, by the way, receive just $2.8bn in targeted tax incentives, according to the Foundation, which is less than 3 percent of all incentives.
But there will reportedly be plenty of others fighting the budget proposals, some primarily because they’re already paying well under 35 percent. This is likely due to some of the loopholes of which Mr. Obama speaks. Here is a list of “Generally Available Tax Provisions” from the Tax Foundation and the “cost” to the US each year:
- Deferral of income from controlled foreign corporations ($32.7bn)
- Deduction for U.S. production activities, which is also known as the manufacturing deduction ($8.7bn)
- Deferred taxes for financial firms on certain income earned overseas ($5.4bn)
- Inventory property sales source rules ($2.8bn)
- Graduated corporation income tax rate ($4.2bn)
In the past the president has discussed ending or limiting the first item above, which is companies’ ability to defer tax on foreign profits until repatriated – and then they’re taxed at a company’s normal tax rate (see related story here). That issue isn’t taken up in the latest budget, but there are some international “loophole closers” and reforms including proposals to:
- Defer deduction of interest expense related to deferred income
- Determine the foreign tax credit on a pooling basis
- Tax currently excess returns associated with transfers of intangibles offshore
- Limit shifting of income through intangible property transfers
- Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates
- Limit earnings stripping by expatriated entities
- Modify tax rules for dual capacity taxpayers
As for financial companies, among the proposals is a plan for imposing a financial crisis responsibility fee.
Notwithstanding the back and forth that will come over the next few weeks and months – Republicans have been highly critical of the budget so far – Mr. Obama said these reforms would take time. “Successful comprehensive tax reform is a long process, often taking several years, but even though it is a daunting task, we cannot afford to shirk from the work,” he said.