President Obama’s tax proposals announced Monday outline a liberal path to fixing the broken corporate tax code amid Republican control of Congress.
“We will see, I think, a significant opportunity to advance some of these ideas,” said Shaun Donovan, director of the Office of Management and Budget, on introducing the budget Monday.
The two parties face irreconcilable differences when it comes to individual taxes, and Obama’s budget request widens the divide by calling for more tax increases on businesses and high-income earners.
But White House officials said Monday that they hope that their new plans for addressing the problems with international corporate taxation could be the starting point for the corporate tax reform discussions they have said they want to have.
“There is, at a strategic level, real alignment,” between Obama and Republicans, Obama economic adviser Jeffrey Zients said at a press event on the fiscal 2016 budget.
“Everybody agrees that we have to fix our infrastructure. Everybody agrees that the current tax system doesn’t work, that our statutory rate at 35 percent is the highest in the world, that our international system is dysfunctional,” Zients said.
At 35 percent, the U.S. statutory corporate tax rate is the highest among developed nations, although many companies pay far lower effective rates by using the tax breaks that litter the tax code.
The US. also stands out from other advanced economies in that it taxes companies on their earnings in foreign countries. Because, however, it collects those taxes only when the earnings are brought back into the U.S., American companies currently hold more than $2 trillion in profits overseas.
Republicans, such as House Ways and Means Committee Chairman Paul Ryan, have proposed taxing corporations only on income earned within U.S. borders. Such “territorial” tax systems, as they are known, are the norm for developed countries.
The GOP also favors reducing the statutory corporate tax rate to 25 percent while broadening the tax base by eliminating companies’ credits, deductions and other preferences.
Obama has sought to lower the rate to 28 percent, with a lower 25-percent rate for manufacturers. But in past budgets, the administration has held onto the U.S. worldwide tax structure.
The tax proposals made Monday, however, aim to split the difference with a new 19 percent minimum tax rate on foreign earnings. With that and other measures, Obama’s advisers hope to make U.S. companies more competitive, raise revenue and stop U.S. companies from moving their headquarters out of the country to lower their tax bills in so-called corporate “inversions.”
The minimum tax rate would mean that U.S. corporations would still owe U.S. taxes on foreign earnings, and that they could not defer them until repatriation as they can now. But because they would receive credits for taxes on earnings paid to foreign governments, the taxes would be low, or in some cases, zero. It would be a better deal than the 28 percent rate they would face under a worldwide plan.
The Obama administration also would impose a one-time, 14-percent tax on all current foreign-held earnings and apply the resulting $270 billion in revenue to infrastructure spending projects, such as building roads, bridges and ports.
The tax plans introduced with Monday’s budget rollout were swiftly rejected by key Republican lawmakers.
“I want to work with this administration, and I hope that we can find common ground. But the president has to demonstrate that he’s interested in governing, not just posturing,” Ryan said in a response to the budget.
U.S. Chamber of Commerce economist Martin Regalia similarly dismissed the plans, calling it “more of a political document than an operational plan.”
Nevertheless, Obama administration officials suggested that the GOP could swallow some features of the plan in a compromise setting.
Donovan noted that former Republican Ways and Means Committee Chairman Dave Camp, who retired at the end of 2014, included several of the Obama administration’s plans in his tax reform draft published last year.
In particular, Camp would have retained some taxes on foreign earnings and would have used a one-time tax on the cash corporations have stockpiled overseas to fund highway spending. Camp also included a tax on large banks that has been featured in Obama’s budgets.
If a Republican could embrace those ideas once, they may be able to do so again, Obama officials hinted Monday. “This is going to be a compromise,” said White House press secretary Josh Earnest, later acknowledging that “I’m not suggesting that this is going to be easy.”
