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Obama tax plan: New loopholes

Economists are split over the president's proposal to give manufacturers more tax breaks. Under the current system, different industries have different effective tax rates.

By MSN Money Partner Feb 23, 2012 1:11PM

This post is by Christopher S. Rugaber and Paul Wiseman of The Associated Press.

 

Cutting corporate tax rates and deleting loopholes is just what most economists prescribe for the tangled U.S. tax code.

 

So why isn't everyone cheering the plan President Barack Obama unveiled Tuesday to slash the top corporate tax rate and end breaks that let some companies pay little or nothing in taxes?

 

Economists note that Obama's plan would upturn the very playing field the administration says it wants to level. It would give manufacturers preferential treatment: Tax breaks would effectively cap their rate at 25%. Other companies would pay up to 28%.

 

The current top corporate tax rate is 35%.

 

Some say such varying rates can distort the economy by diverting investment into some industries and away from others that might pack a bigger economic punch. (Post continues after video.)

"The administration is not making sense," says Martin Sullivan, a contributing editor at publisher Tax Analysts. "The whole idea of corporate tax reform is to get rid of loopholes, and this plan is adding loopholes back in."

 

Other economists oppose a separate plank of the Obama plan: a minimum tax on foreign earnings of U.S. multinational companies. No other country imposes such a tax on its companies, they note. U.S. businesses would face a competitive disadvantage.

 

Facing resistance from Republicans and many businesses, Obama's plan is in any case a longshot proposal so close to Election Day.

 

"For anything that Obama recommends during an election year and with a divided Congress, the best one can say is, 'Good luck,'" says Henry Aaron, a senior fellow in economic studies at the Brookings Institution. "Those who stand to lose are really upset and will work hard to defeat it."

 

Rules vary by industry

 

Just about everybody agrees something has to change. When Japan enacts a corporate tax cut in April, the United States will be left with the highest tax rate in the developed world.

 

That puts the U.S. companies that actually pay the official corporate tax rate at a disadvantage against their foreign competitors. (Many U.S. companies effectively pay lower rates because of tax breaks.)

 

The loophole-riddled U.S. tax code now benefits numerous industries over others. One tax break, for example, lets oil companies write off drilling costs immediately. Most businesses must write off such capital outlays over time.

 

In the end, different industries can pay far different effective rates. The Treasury Department says U.S. utility companies pay an average effective tax rate of 14%. By contrast, retailers pay an average of 31%.

 

The administration says the point of its tax plan is to make the system fairer and more efficient -- not to squeeze more overall tax revenue from corporations. Treasury Secretary Timothy Geithner calls the current tax code "fundamentally unfair." But the administration also needs to end some loopholes to help pay for a lower corporate tax rate.

 

Job creation and research

 

The White House argues that tax breaks for manufacturers could ultimately pay off for the economy. When factories expand, for example, the benefits tend to spill into other businesses: Shipping companies and warehouses must add jobs, fro example, transport and store the goods that manufacturers are producing.

 

Economists also note that manufacturers account for a disproportionate amount of the research and development that create innovative products and new ways of doing business. The National Science Foundation has found that manufacturing companies are nearly three times likelier to introduce a new or significantly improved product than other companies are.

 

"Does manufacturing deserve special treatment? This is a hot debate," says Elisabeth Reynolds, executive director of the Industrial Performance Center at the Massachusetts Institute of Technology. "A case can be made that there's a reason to encourage more manufacturing in the United States because of its links to innovation."

 

Other economists say that argument is overstated. Among the skeptics is Obama's own former economic adviser, Christina Romer, an economics professor at the University of California, Berkeley. In a column this month in The New York Times, Romer argues that there is no economic justification for the government to favor manufacturers over service-oriented companies.

 

"Our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada," Romer writes.

 

Tax on foreign earnings

 

Analysts are also divided over Obama's plans to impose a minimum tax on companies' foreign earnings.

 

Sullivan, of Tax Analysts, says the current system allows some companies -- especially technology and pharmaceutical firms -- to avoid U.S. taxes by shifting their earnings to tax havens such as Bermuda and the Cayman Islands. Other multinationals can indefinitely avoid paying U.S. taxes by keeping their earnings overseas.

 

Lacking such tax breaks, companies that do all their business in the United States suffer a competitive disadvantage.

 

The minimum tax proposal, Sullivan says, "would level the playing field."

 

But big U.S. companies complain that they already pay taxes to foreign governments on the income they earn in those countries. A U.S. tax on that income, they argue, would amount to double taxation.

 

That would raise costs for U.S. companies operating overseas, making them less competitive. Instead, the United States should move toward a "territorial" tax system, business groups argue. Tax would apply only to income earned within the United States.

 

"No other developed country imposes such a 'minimum tax' on the foreign earnings of their corporations," said the Business Roundtable, a trade group of chief executives of large U.S. companies.

 

Some economists agree.

 

The minimum tax proposal for international earnings "is totally misguided both from a competitive standpoint and a jobs standpoint," said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. "Obama's plan, if enacted, will shrink the U.S. footprint in world markets and lose jobs."

 

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

 

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10Comments
Feb 23, 2012 6:01PM
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Obama is a typical Chicago politician.... a lying cheat!  God help us if he wins another term.  
Feb 23, 2012 6:23PM
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FLAT tax them all, same rate across the board and ZERO deductions, the only deductions should be for NEW hires that work a minimum of one year, incentives should only be offered to companies with no Overseas manufacturing, and imports need to be taxed at a higher rate than they are presently taxed, lets level the playing field once and for all ..........
Feb 23, 2012 8:19PM
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Typical politician: let's get rid of tax breaks, except for the ones I believe in.

Foreign earnings of US corporations are not necessarily tax free.  It is usually taxed by the country in which the earnings are made, regardless of the domicile of the parent company.
The US taxes worldwide income with a tax credit for tax paid to the foreign company in which the earnings are made.  If the foreign tax is less than the US tax would be if the earnings had been US, the difference is owed to the the US.  The tax "break" is that the difference, if any, does not have to be paid until the earnings are "repatriated"--that is brought back to the US.
They eventually are.

It would be great to make the US corporate tax rate 28% (for manufacturing as well--no special interest group break!).  Now what do you do about the difference in tax rate between corporations and proprietorships (where earnings are taxed at ordinary income rates of up to 35% currently).  Don't things have to be fair in this respect as well?  It has been considered to be to date.  Oops, that would mean lowering tax rates for those evil rich people to 28%.

The US budget used to run (before the current administration) to 20% or so of the economy.  That is plenty large enough role for government.  A top rate of 28% is more than adequate to fund that.  Get rid of preferential treatment, special deductions.  I'm tired of subsidizing churches through the effect on the tax take of the charitable interest deduction; of subsidizing people having children through the exemptions and marital rate adjustments; of subsidizing home ownership--obviously stupidly-through the mortgage interest deduction........it's endless in the personal as well as corporate world.  Get rid of the lower rates for  dividends (but in real fairness to avoid double taxation, allow dividends to be a business expense like interest and payroll, and therefore tax deductible).  A low long term tax rate for a one year holding period is clearly dumb: one year is not long term.  Make it longer!  By all means make income tax rates "progressive" (such a misuse of the word) with income level.  But make everyone pay something, even if 1% for the bottom fifth of earners.

If Obama wants support, he has to lead instead of prevaricating around his own party's biases.  Make a complete proposal.  Partial proposals are a means to manipulate the result.
A complete proposal has to be consistent around a clear set of principles.  Did I say "principles"?  Oh yeah, politicians are involved.

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GE didn't pay any tax because of the tax laws. Was it right? That is an opinion; however, what they did was legal. I don't think it is right for people to collect EIC Earned Income Credit; however, it is legal. Remember a tax loophole is only a loophole if one doesn't legally qualify for the extra income or deduction. My house is fully paid for so in my opinion anyone taking an interest deduction on their home is taking advantage of a tax loophole.
Feb 24, 2012 11:01AM
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Are the loopholes we have now the reason GE didn't pay any taxes last year?
Feb 24, 2012 11:03AM
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Wow, I pay more taxes than GE! Aren't I great?
Apr 9, 2012 9:40AM
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"Instead, the United States should move toward a "territorial" tax system, business groups argue. Tax would apply only to income earned within the United States."

 

And now, with taxes HIGHER already, in this country, where is the incentive for corporations to invest even further in redeveloping this country?

While agreeing with the central idea, our entire tax system needs a major overhaul, loopholes need to be closed, and a more and fairer system needs to be initiated.  Until that bunch of greedy lawyers, representing themselves, in OUR halls of Congress, get together, and start doing what they are OVERpaid to do, nothing will happen.

Feb 23, 2012 8:02PM
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The Pres. knows this will never pass. He does this so the redumlicans vote against him. They all pull this trick at election time.
Feb 23, 2012 7:18PM
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Sure, lets socialize the expenses, (let everyone pay the taxes for product manufactured here, except those who buy and sell those products) and privatize the profits(adding more loopholes idea from the "no more earmark guy")................sounds distinctly republican!
Feb 23, 2012 7:22PM
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 THERE ARE 8% MORE MILLIONAIRES and TONS MORE POOR! The time has come for the working class to get a break. If you are tired of just making it by, then you need to do something about it. THERE ARE WAYS TO BREAK FREE FROM THE 9-5 LIFE. G00GLE the term ' FAST MARKET CASH ' all one term and click the first site. Go right to the 'PENNY' 'STOCK' page to see what the rich don't want you to know.TAKE CONTROL OF YOUR FINANCIAL WELL-BEING TODAY! Or you can just let the rich continue to dominate this country and steal your family's money.

 

 

 

 

 

 

 

The minimum tax proposal for international earnings "is totally misguided both from a competitive standpoint and a jobs standpoint," said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. "Obama's plan, if enacted, will shrink the U.S. footprint in world markets and lose jobs."

  

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