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Whose tax break are you calling a loophole?

President Obama's proposal for tax reform and a simplified tax code will run into trouble once talk turns to ending specific tax benefits.

By Teresa Mears Jan 26, 2011 4:04PM

This article is by Stephen Ohlemacher of The Associated Press.


President Barack Obama's call to lower corporate tax rates is popular among business leaders and lawmakers from both parties. That support, however, won't be easy to maintain if the president ever gets specific about how to pay for the lower taxes.

Obama said in his State of the Union address that he wants to close corporate tax loopholes and use the additional revenue to lower corporate tax rates for the first time in 25 years -- without adding to the budget deficit. The top corporate tax rate is 35%, among the highest in the industrialized world. However, federal tax laws are filled with so many credits, deductions and exemptions that few companies pay the top rate.


"Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries," Obama said in his speech Tuesday night. "Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense. It has to change."


Meanwhile, key congressional Republicans said Wednesday that tax reform shouldn't be limited to corporate taxes -- individual income taxes should also be revamped.


Obama's goal is to create a simpler tax code that encourages sound business decisions rather than aggressive tax planning. As it stands now, businesses and individuals spend more than 6 billion hours a year working to comply with the tax code, according to the National Taxpayer Advocate, an independent watchdog within the Internal Revenue Service.


It will take a sustained effort by the administration, however, to forge a consensus with lawmakers on reshuffling corporate taxes in a way that is sure to create winners and losers. The "loopholes" Obama talked about in his speech are regarded as cherished, well-deserved tax breaks by many lawmakers in both parties.


"I'm asking Democrats and Republicans to simplify the system," Obama said. "Get rid of the loopholes. Level the playing field."


There are tax breaks for investing in new equipment and buildings, spending on research and development and investing overseas. There are tax breaks for the owners of NASCAR race tracks and movie production companies. There are tax breaks for oil, natural gas and coal companies, as well as the producers of alternative fuels.

In all, the tax code runs 3.8 million words.


"Most of those words are in there because somebody's lobbyist wanted them in there," said Howard Gleckman, a fellow at the Urban Institute and editor of TaxVox, a blog on tax issues. "Everybody likes their special interest tax break."


Obama called for eliminating billions in tax breaks for oil companies to help fund research on alternative energy. It was a replay of his budget request last year, when he asked Congress to increase taxes on oil and gas companies by a total of $36.5 billion over the next decade. Congress largely ignored the request.


The nation's fiscal problems limit Obama's options. The federal budget deficit reached $1.3 trillion in the budget year that ended in September. The Congressional Budget Office predicted Wednesday that budget deficit will hit almost $1.5 trillion this year. Some economists say Obama should use tax reform to raise taxes, helping to reduce the federal budget deficit.


Obama wants corporate tax reform to be revenue-neutral, meaning the system would, overall, raise about the same amount of money it does today. Different industries, however, could have higher or lower tax bills, depending on whether tax rates are lowered enough to offset lost tax breaks.


Republican leaders in Congress said they are ready to work with Obama to lower corporate tax rates and simplify the tax code, but they will not support an overall increase in taxes.


"The complexity on the business side means that different companies, different industries pay different rates, and I think that calls into question the fundamental fairness of the tax code," said Rep. Dave Camp, R-Mich., chairman of the tax-writing House Ways and Means Committee.


Camp, who would play a big role in any tax reform package in the House, said Congress should work to revamp both the corporate income tax and the individual income tax. He noted that most small business owners pay business taxes through their individual tax returns.


Sen. Orrin Hatch of Utah, the top Republican on the tax-writing Senate Finance Committee, agreed.


"We cannot limit reform to just the corporate side of our tax code," Hatch said. "Instead, we must cast a wide net and examine the entirety of the tax code, which is overly burdensome and complex not only to corporations, but small businesses and families as well."


Obama made only a passing reference in his speech to reforming individual income taxes, saying he would like to join members of Congress in their efforts to simplify the tax code for individuals. Gleckman said Obama would have to take a much more active role in getting any tax reform package through Congress.


"Presidential rhetoric is necessary but not sufficient to get this done," Gleckman said. "He's going to have to come up with a plan."


The business community has been calling for corporate tax reform for years, arguing that federal tax laws are inefficient, hurting their competitiveness. But none are stepping forward to give up the tax breaks that benefit them.


"We welcome the debate on tax reform," said Dorothy Coleman, vice president of tax and domestic economic policy for the National Association of Manufacturers. "The current tax system is a drag on economic growth and investment."


Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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Jan 27, 2011 1:38PM
Ok Everything i'll do that when the people on top arent welfare recipients using their welfare money as income to claim the EIC for each of their seven kids, and in turn getting thousands back for doing nothing...what part of EARNED didnt they understand? Nice country we live in...24 thousand to live off of free, and then a big ol incentive to just keep sitting on their asses! v
Jan 26, 2011 6:27PM
We all need to get over ourselves and quit thinking about it in terms of who's going to come out on top. 
Feb 1, 2011 1:29PM

It doesn't matter what you call them, we need to get rid of all of them and simplify the tax code. All of them represent some sort of welfare, either corporate or personal, and that shouldn't be done through the tax code. If Congress wants to give out corporate or personal welfare, let them man up (and woman up) and vote directly for these cash handouts as items in the budget. Would be even better if they had to vote on these payouts line-by-line, and thereby go on record as having voted to give that money away in the face of massive deficits.


That said, the exemption of gains/losses on the sale of your house should stay. It never was allowed as a deduction if it was a loss anyway, so not fair to tax a gain. Also, it's ridiculous to have to keep up with every improvement cost you made to your home so you could claim it--or else get taxed when you sold and bought another.

Jan 27, 2011 8:35PM

Our economy is not the economy that existed when the income tax was enacted. It is continually changes from recession to inflation cycles. It is a dynamic economy, yet we have a static tax system. The Fair Tax and The Flat Tax are static taxes.  It takes a politically 545 member divided committee to long to make changes to keep up with the economy's changes. This is a very inefficient system. It would be much better if the economy determined what it needed to operate efficiently.


Currently their are tax laws that become destructive to our economy when the economy changes from recession to the inflation cycle.. If you google my name you will find my websites where I have posted my Zero Inflation Taxation Policy. This policy will make our economy more efficient and maintain a balance in our economy. Balance is what is needed to create economic prosperity for our citizens

Feb 16, 2011 10:35PM

Flat Tax 15% for everybody!!! Don't care if you make 10,000 or 10,000,000, the same for everybody.


Demolish the money printing press and hire a 3rd grader to write checks and balance the government checkbook!!!

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