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Corporate Tax Cuts Could Sweeten Tough US Debt Talks

The Obama administration is preparing to inject an unpredictable new variable into its economic policy clash with Republicans: a plan to overhaul corporate taxes.

Mark Harwood | Iconica | Getty Images

Economic advisers have nearly completed the process initiated in January by the Treasury secretary, Timothy F. Geithner, at President Obama’s behest. That process, intended to make the United States more competitive internationally, has explored the willingness of business leaders to sacrifice loopholes in return for lowering the top corporate tax rate, currently 35 percent.

The approach officials are now discussing would drop the top rate as low as 26 percent, largely by curbing or eliminating tax breaks for depreciation and for domestic manufacturing. Final options have not been presented to Mr. Obama, but officials aim to unveil a single proposal or a set of alternative plans as early as May.

So far, administration officials have been encouraged by support among business leaders for the tradeoffs needed for rate reduction. Whether that survives the legislative process in Congress is another matter.

“The question is, Is the business community going to support this because it’s a win for the economy over all?” said Gene Sperling, director of Mr. Obama’s National Economic Council. “Or, is it going to get held up because each business will decide whether they’re a temporary winner or loser compared to the status quo?”

The stakes extend beyond corporate taxes. The plan is taking shape, after all, as Republicans and Democrats haggle over rival approaches to deficit reduction and an increase in the federal debt ceiling. The tax plan could become a wild card in that debate.

Balancing the Change

Rewriting tax law is never easy. And the administration’s effort to overhaul corporate taxation poses special challenges.

The current system taxes only about half of business income, because many enterprises, particularly small ones, are organized to pay taxes under the income tax code for individuals. The Republican chairman of the tax-writing House Ways and Means Committee, Rep. Dave Camp of Michigan, says corporate taxes should be changed only in tandem with an even more politically daunting overhaul of the tax code for individuals.

Balancing deficit concerns with its desire to improve relations with businesses, the Obama administration wants any corporate tax overhaul to be “revenue neutral” — that is, a new system should bring in no more or less money from businesses than the old one did.

Thus some sectors with comparatively few major deductions could win big, including Wall Street. Others paying lower “effective rates,” like domestic manufacturers, could lose.

Multinational corporations want America to follow other major economies in adopting a “territorial” tax system that excuses profits earned overseas from United States taxation.

That could expose lawmakers to attack for encouraging corporations to further shift jobs abroad. And permanently shielding overseas income from American taxes would complicate the task of lowering the 35 percent top rate.

Administration officials, however, see ways to ameliorate each potential objection. The United States could adopt a modified system rather than pure territorial one, for instance, or eliminate part but not all of the existing domestic manufacturing credit.

Notwithstanding Mr. Obama’s reputation for strained relations with business, some influential corporate leaders voiced optimism about the emerging approach that Mr. Geithner has told them privately he is preparing to release.

“I would expect it in the next two weeks,” said Johanna Schneider, a top official at the Business Roundtable, a lobbying group made up of chief executives of the nation’s biggest companies. “All the stars are aligned.”

Changing the Mood

By definition, a revenue-neutral shift in business taxation would seem irrelevant to the battle over reducing America’s long-term budget deficit. But it isn’t.

Proposing to cut the top rate for corporations poses the risk of aggravating unease among Democrats as they negotiate with Republicans over spending cuts in the monuments of modern liberalism: Medicare, Medicaid and Social Security. The recent revelation that the nation’s largest corporation, General Electric, paid no federal tax for 2010 despite $14.2 billion in worldwide profits makes a business tax-rate reduction an even tougher sell.

Yet such a proposal could sweeten the mood among Republicans as they consider Mr. Obama’s insistence that any long-term deficit reduction deal include increases in revenue from the individual tax code. The options that administration aides have been sifting through are close to the 25 percent top rate that Mr. Camp, the House Republicans’ point man on taxes, has suggested for corporations and individuals alike.

A corporate tax overhaul would also complement the work of the Senate’s bipartisan “Gang of Six,” which is working on a compromise to meet Mr. Obama’s call for a “balance” of spending reductions and tax increases. Those three Republicans and three Democrats are focusing on proposals for the individual tax code.

Like the Treasury, they plan to release their handiwork as early as next month.

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