President Obama's Corporate Tax Reform Plan
True to this year's State of the Union address, the Obama Administration released a proposal Wednesday that seeks to lower the corporate tax rate from 35 percent to 28 percent while eliminating many loopholes and broadening the base.
A special emphasis was placed on the manufacturing sector in particular. The deduction for domestic production activities, which mainly benefits manufacturers, would be narrowed and increased from nine percent under current law to 10.7 percent (and doubled for advanced manufacturers, per his President’s budget), with the intention of creating a 25 percent effective marginal rate for manufacturers. Presumably, the "narrowing" aspect would be their previous proposal to disallow the deduction for fossil fuel-related activities. Other tax expenditures in the President’s proposal include making the R&E tax credit permanent and increasing it from 14 to 27 percent and making permanent and refundable the tax credit for renewable electricity production.
In terms of revenue-raisers, the proposal largely reprises ones from the President's budget, such as ending "last-in-first-out" accounting for inventory, taxing carried interest as ordinary income, and eliminating accelerated depreciation for corporate jets. Beyond that, the proposal simply gives principles for further reducing tax expenditures: addressing (apparently, lengthening) depreciation schedules, reducing the bias towards debt financing, and establishing greater parity between large corporations and large non-corporate counterparts.
The President also outlines the global minimum tax on multinationals’ foreign earnings and remove deductions for moving operations abroad, policies that were mentioned in the State of the Union speech. The minimum tax is in contrast to the Fiscal Commission proposal and a draft proposal from House Ways and Means Committee chairman Dave Camp (R-MI) to switch to a territorial tax system, which would not tax income earned outside the country. Details of the proposed minimum tax, such as the rate, were not given, but it draws a clear area of disagreement in the political spectrum over how to approach international taxation.
In addition to the minimum tax, the Administration would defer the interest expense deduction related to overseas investment until that income is taxed in the US, and it would tax excess profits associated with transferring intangible assets (such as intellectual property) to affiliates, both prior used policies. The combination of these revenue-raisers and the minimum tax is to bring the tax code more towards a system of worldwide taxation, where businesses are taxed on income regardless of where it is earned.
The plan also includes provisions for small businesses that have been proposed before, such as increasing the amount of investments they can expense from $500,000 to $1 million, doubling the deduction for start-up costs and making the health insurance tax credit for small businesses under the Affordable Care Act more generous.
|Elements of the Corporate Tax Plan (billions)|
|Reduce Top Rate to 28 Percent||~-$750|
|Extend and Increase R&D Credit||-$110|
|Extend and Expand Certain Clean Energy Incentives||-$4|
|Double Deduction for Start-Up Costs and Expand Small Business Health Insurance Credit||-$17|
|Eliminate LIFO Accounting||$73|
|Tax Carried Interest as Ordinary Income||$13|
|Eliminate Fossil Fuel Tax Preferences||$30|
|Reform Treatment of Insurance Industry and Products||$20|
|Defer Interest Expense Deduction for Foreign Income||$37|
|Tax Excess Returns Associated With Transfer of Intangible Property||$23|
|Eliminate Accelerated Depreciation for Corporate Jets||$2|
|Change Tax Treatment of Business Moving Expenses||Unk|
|Reform Domestic Production Deduction||Unk|
|Institute a Global Minimum Tax||Unk|
Source: President's budget except the rate cut, which comes from JCT.
The Obama Administration states that the proposal is designed to be revenue-neutral, or (put another way) designed so that expiring corporate tax provisions do not add to the deficit. However, he has yet to spell out all of the base broadening, naming only the specifics above and suggesting that remaining savings could come from changing depreciation schedules, modifying the tax treatment of interest, or making other changes.
It is good to see corporate tax reform on the table, since we need to be making smart changes that help boost the economy while we also reduce the debt. Still, this proposal includes a lot of lost revenue without a solid plan for paying for it within ten years (at least so far). We have said in the past that lawmakers should at the very least not add to the deficits, and should be part of a tax reform or deficit reduction package which substantially improves our current debt trajectory.
To see expert reactions to the proposal, click here.