President Obama wants to lower the corporate tax rate from 35% to 28%. He wants an even lower rate for U.S. manufacturers to encourage corporations to produce at home.
Although the move could benefit U.S. corporations down the road, right now it's much more a political tactic than a realistic policy change.
"This is a very cynical move," Greg Valliere, chief political strategist at the Potomac Research Group, told Bloomberg Television. "It comes one day before a Mitt Romney speech in Detroit in which Romney will outline his tax proposal. So in effect the White House is saying, "Hey, we're in favor of tax reform,' even though they know there's virtually no chance of getting anything done this year."
This year will likely mark the start of serious corporate tax rate discussions, but with an election in the fall and bipartisanship in Washington, don't expect a tax rate change in 2012.
"This is such a bitterly gridlocked and divided Congress that something this enormous I think has no chance of making it before 2013," said Valliere.
President Obama's Corporate Tax Rate Plan Ends PerksEven though the U.S. corporate tax rate is the highest in the world after Japan's, through strategies like exemptions and deductions some corporations pay much less - and President Obama's plan aims to end those perks.
For example, a study by nonpartisan tax analysts found that 115 of the U.S. corporations in the Standard and Poor's 500 Index paid a total corporate tax rate of less than 20% over a five-year period, according to The New York Times. Another study by the Government Accountability Office in 2008 found 55% of U.S. companies paid no federal income taxes in at least one year of the seven-year period studied.
Some U.S. corporations also have been benefiting from moving production and profit overseas. President Obama wants to encourage U.S. manufacturing as well as be able to collect more money from richer corporations that are hiding profits overseas.
In addition to the lowered corporate tax rate, President Obama's proposal imposes a tax on corporations' foreign earnings and eliminates current loopholes and subsidies many businesses enjoy. Corporations supporting clean energy would get an additional tax rate benefit.
"The current tax code was written for a different economy, a different era," said U.S. Treasury Secretary Timothy Geithner, who plans to meet next week with members of Congress to try to win support for the plan. "This process will take some time. It will be politically contentious, some will say these proposals are too tough on business, others will say they are not tough enough."
The plan will help U.S. businesses that can't benefit from the loopholes and pay close to the 35% rate, like Harley-Davidson Inc. (NYSE: HOG) and UnitedHealth Group Inc. (NYSE: UNH), according to Citizens for Tax Justice.
Companies that will likely pay more include large multinationals like General Electric Co. (NYSE: GE) and The Boeing Co. (NYSE: BA).
Republicans' Corporate Tax Rate PlansRepublicans in Congress have been pushing for an even lower rate of 25% across the board, with many tax breaks kept in place.
Romney supports a 25% tax rate; former House Speaker Newt Gingrich, R-GA, wants to drop the rate to 12.5%; and former Sen. Rick Santorum, R-PA, supports a rate exemption for domestic manufacturers and halving the top rate for others.
President Obama's plan, unlike the Republicans', would cause no deficit increase because it eliminates the rate-cutting loopholes.
"A big concept here, a big difference between the White House and the Republicans is that the Obama plan would raise revenues," said Valliere. "I think the Republican plans, which would lower the tax even more, would either be revenue neutral, or in all likelihood would lose money."
News and Related Story Links:
Valliere on White House Corporate Tax Rate Plan
The New York Times:
Obama Offers to Cut Corporate Tax Rate to 28%