Tax Reform Game: How Low Will Obama Go?

Feb. 8, 2011 — -- In a speech to the Chamber of Commerce, President Obama vowed to boost the country's competitiveness and cut corporate taxes, but he gave few hints about how he would reform the tax code.

While lawmakers are just starting the long road to simplifying the tax code, the president said he wants to reform taxes without raising the $14 trillion deficit.

"I am eager to work with both parties and with the Chamber to take additional steps across the budget to put our nation on sounder fiscal footing," the president said Monday.

Reforming the tax code, however, is sure to be a complicated process -- from lowering corporate taxes to closing loopholes. Lawmakers are not sure exactly where to begin.

"There are different levels in the debate right now," said Scott Hodge, president of The Tax Foundation. "At the forefront, there is growing recognition that the U.S. corporate tax rate is too high and needs to be cut to make the U.S. more competitive. The president acknowledged that in the State of the Union Address."

The U.S. corporate tax rate will be the highest of the 34 countries in The Organization for Economic Cooperation and Development when Japan lowers its corporate tax rate this year, according to Eric Toder, co-director of the Tax Policy Center. The rate, 35 percent, is 39 percent when including average state corporate taxes, according to the Tax Policy Center.

However, federal taxes are at their lowest level since 1950 by some measures, and many companies are able to dodge taxes entirely or pay very little. A report from the Government Accountability Office found that two-thirds of U.S. companies, or 1.3 million businesses, did not pay federal income taxes between 1998 and 2005.

Toder wrote on the Center's website that even with tax reform, corporate taxes are difficult to collect for companies that transcend national boundaries.

"Congress and the I.R.S. can and should continue to try to outlaw specific abusive transactions, but it is a never-ending and losing game as well-paid private sector advisers find new ways to shift income within the letter of the law," Toder wrote.

Hodge said most companies were waiting with "bated breath" to see if the president would announce specific proposals during the speech to the Chamber of Commerce, but he did not expect Obama to highlight specific tax breaks. Hodge said he was hoping to hear how low the president believes corporate tax rate needs to for the country to be competitive globally.