Treasury Secretary Optimistic on Business Tax Reform

There is optimism that Congressional Republicans and the Obama administration can forge a bipartisan consensus to reform “a dysfunctional [business] tax system,” Treasury Secretary Jacob Lew said Wednesday at the Brookings Institution, a Washington think tank.

In his opening speech, Lew said that the entire federal tax code needs to be overhauled. “It has been almost 30 years since we last rewrote it, and since then, the tax system has become heavily burdened by loopholes and inefficiencies.” Lew acknowledged that there is good-will on both sides, at least regarding business tax reforms, and put the odds of an overhaul at “better than 50-50.”

“On paper, we have one of the highest corporate income tax rates in the world, but in practice, there is a wide disparity in effective corporate tax rates,” Lew said. “Some corporations pay little or no income tax at all, while others pay the highest rate in the developed world. Even worse, our tax system allows American companies to shift profits overseas to avoid paying U.S. taxes, and actually drives businesses to look for ways to move jobs and their tax home, at least on paper, out of the United States to countries with lower tax rates.” He said there was a greater benefit in efficiency and productivity when cross-border mergers are done for legitimate business reasons.

In September, the Obama Administration made it harder for companies to complete an inversion if they keep most of their business in the United States. Obama’s proposal for a new business tax system does the following:
  • Eliminates dozens of tax breaks and loopholes
  • Reduces the current top corporate tax rate from 35% to 28%
  • Lowers tax rates for domestic manufacturing to 25%
  • Makes manufacturing incentives, including the Research and Experimentation Tax Credit, permanent
  • Creates a new minimum tax on foreign earnings
  • Tightens rules so that companies to make it harder to shift profits to low-tax countries.
  • Eliminates tax deductions that reward companies when they shut down operations in the United States and relocate abroad
  • Provides tax breaks for companies that bring production back to the United States. 
  • Allows a small business to annually expense up to $1 million in investments.

Reform should be revenue-neutral in the short and long-run in part by eliminating loopholes, Lew said.

- Diana Mota, NACM associate editor

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