Geithner talks about corporate tax reform
Treasury secretary explains why administration favors lowering rates while eliminating deductions and credits.
In his State of the Union address, President Barack Obama called on Congress to embark on a major revamp of corporate taxes: "[S]implify the system. Get rid of the loopholes. And use the savings to lower the corporate tax rate for the first time in 25 years -- without adding to our deficit."
On Wednesday, Treasury Secretary Timothy Geithner talked to The Wall Street Journal's David Wessel about the initiative. Geithner emphasized the administration's insistence on offsetting the corporate rate, now 35%, by eliminating deductions, credits and incentives.
Raising more revenue from businesses in light of global competition "isn't realistic," he said. But, given the deficit, "We can't raise taxes on individuals to lower business taxes."
He wouldn't say if the administration wants to move from taxing multinational corporations' global profits and instead tax only domestic profits, as most other countries do and as U.S. business wants. But he said a "level playing field" is a major goal.
The White House isn't planning to include a specific proposal in the president's February budget.
Q. How would corporate tax reform help economic growth?
A. Lowering rates, removing the distortions in the present system, helps growth because it allows business to compete on the basis of performance and return rather than on their ability to get or protect special provisions in the tax code. If you level the playing field, you allow the market rather than the tax system to drive investment.
Q. How much does the corporate tax rate need to fall to make a difference?
A. To have a more competitive system, you want to try to bring down the rate closer to the range of our major trading partners. We have a high statutory rate, which is made necessary by all the special provisions. How low you can go depends on how much of the reform you can achieve.
Q. What's the point of going through the political minefield if this doesn't ultimately lower the business tax burden?
A. All businesses want lower taxes. But business understands that their success as businesses depends in part on what the government does -- on education, infrastructure, national security….Most business understand that we have limited resources, that we can't raise taxes on individuals to lower business taxes and that unsustainable long-term deficits hurt growth too.
Q. Given the deficit, what's the point of going through all this if it doesn't raise revenue to reduce the deficit?
A. You've had a very broad substantial reduction in corporate tax rates outside the U.S. That occurs at a time when it's much easier -- because of technology -- for companies to shift investment and income to take advantage of lower tax rates overseas. We can't expect to raise significant additional revenue from business, as a share of GDP, from the corporate tax without hurting our competitive position, without hurting growth. It isn't realistic.
Q. Half of all business profits go to enterprises that don't pay the corporate tax. They're taxed as individuals. Are you looking at them, too?
A. A lot of people have suggested that we look at business income generated outside what we call the corporate sector. There is a lot of income there and many of the distortions in the corporate sector affect them, too. It's worth taking a look at.
Q. Are you willing to consider a shift away from the current system, in which multinationals are taxed on their world-wide profits, to a territorial one, in which they're taxed only on their U.S. profits?
A. We want to find a way to reduce the incentive to shift income overseas, to increase the incentive to invest in the U.S. and to put U.S. firms that operate overseas on a level playing field with their competitors.
Q. The president also mentioned his interest in pursuing simplification of individual income taxes. Is that as high a priority?
A. As he said, along with corporate tax reform, we want to explore comprehensive individual reform. There's a good case for doing both. We want to start the process of exploring what's possible.
Q. What are the next steps?
A. It's good for confidence if we can find things that both Democrats and Republicans want to do. We're in the first inning. We're going to keep consulting -- with key committee chairman, with ranking members, with other stakeholders, with architects of past reforms, both ones that worked and those that didn't. Everybody who looks at the current system says: We can do better than this. And there's a lot of interest in doing it. A lot of people in the business community are prepared to be part of something that is revenue neutral, broadens the base, and lowers the top rate. Others want to hold out for something better.
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