Tax Analysts Blog

Last Chance for Corporate Tax Reform

Posted on Feb 6, 2011

His budget will not be released until February 14, but if President Obama has any sweets to deliver to the business community he will surely do it at his speech tomorrow to the U.S. Chamber of Commerce. In his State of the Union message--as part of his charm campaign with corporate America--the President soothed business with happy talk about corporate tax rate reduction. But by insisting that rate cuts be offset by cuts in corporate tax breaks (so-called "revenue neutrality") the President at the same time took away any possibility that rate reduction could become reality.

That's because nobody--especially business itself--wants to identify sources of funds to pay for the cuts. Speaking for the Business Roundtable at a Ways and Means Committee hearing on January 20, Proctor and Gamble CEO Bob McDonald asked Congress to take revenue neutrality off the table. He and his fellow corporate chieftains want an overall tax cut . And even if they agree to a revenue-neutral change ("what's the point?" most would ask) they could never find a formula where the interests of winners and losers were not so diverse as to destroy their coalition.

So the only way reform can move forward is if the President unilaterally makes further compromises. Maybe Chief of Staff William Daley and chief competitiveness consultant Jeffrey Immelt can convince the President to shift his position and do business the incredible favor of finding the money to pay for corporate rate cuts. If not, we will have to wait until at least 2013 to get serious about changing our corporate tax laws.

Short of funding for a rate cut, there are two other concessions Obama could dangle in front of business leaders. The first would be his support for a "repatriation holiday"--a repeat of the temporary low rate enacted by Congress in 2004 for foreign profits returned to the United States. The second would be a support for a "territorial" tax system--a tax-exemption for foreign profits long sought after by business. Here Obama can have it both ways because many prominent versions of a territorial system actual raise business taxes. Of course, this is not the type of territorial tax system businesses support, but again--as with the rate cut--Obama can appear very pro-business without conceding a thing.

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