President Obama Seeks 28% Corporate Tax Rate

The Obama administration has proposed an overhaul to the U.S. corporate tax code which would lower the maximum rate paid by corporations while also eliminating a myriad of loopholes used to lower individual businesses' tax bills. The plan would lower the top income-tax rate for corporations from 35% to 28% and the top tax rate for manufacturers would be even lower. The flip side is that a number of popular deductions will be eliminated although credits for things such as research and development and renewable electricity production will remain. "A key test of any reform should be whether the net impact of the changes improves the incentives for investing in the United States," Treasury Secretary Timothy Geithner told reporters. The chances of the ambitious plan being passed by the Congress prior to the next Presidential election, however, is extremely slim. By presenting the overhaul, President Obama is hoping to set a foundation for future broad corporate tax legislation, and if he is re-elected, it will likely become a priority of his second term. While both Democrats and Republicans appear to be in agreement that the current tax system is a mess, the two parties are likely to be in disagreement about numerous details. Today's announcement is a plan, and little else at this point. The proposal also addresses the heated issue of overseas profits, by placing a minimum tax on these profit streams. "If foreign earnings of U.S. multinational corporations are not taxed at all, these firms would have even greater incentives to to locate operations abroad or use accounting mechanisms to shift profits out of the United States," the proposal said. Under the current system, U.S. companies, many of whom generate most of their revenue overseas, do not pay any U.S. taxes on those earnings as long as they are not repatriated back to the United States. The situation has led to a giant pile of cash, estimated at $958 billion, that is just sitting in foreign corporate accounts. The President's proposal is also geared towards stimulating the manufacturing sector which has been devastated by globalization. The plan would create new tax subsidies for U.S. manufacturers and would tax them at a top rate of 25%. One part of the plan that is expected to be politically divisive is how entities who are currently exempt from paying corporate taxes will be treated. Although the plan does not offer any specific proposals, it does acknowledge that changes may be made to how partnerships, such as law firms and other businesses, are taxed. These types of companies are not subject to corporate taxes at all, and instead, partners are taxed at their own individual rate on the profits generated. The Wall Street Journal notes that these entities are politically powerful and changing their tax status could be a divisive move. The Journal also reports that other loopholes the Obama Administration is looking to close include eliminating "last in first out" accounting, disallowing the use of life-insurance policies as a tax shelter and taxing carried interest as ordinary income.