Obama Tax Reform Outline Draws Skeptics

Treasury secretary outlines tax overhaul proposal; some unimpressed.

Feb. 22, 2012 — -- Treasury Secretary Timothy Geithner today outlined President Obama's plan to overhaul business taxes, including the elimination of dozens of loopholes and a reduction in the corporate tax rate to 28 percent, which some critics say is not low enough.

The proposals also include a minimum tax on foreign earnings, although he provided no details.

"We want to restore a system in which American businesses succeed or fail based on the products they make and the services they provide, not on the creativity of their tax engineers or the lobbyists they hire," Geithner said in his remarks.

He said that tax overhaul, which analysts say has little chance of being implemented this year, will be "politically contentious."

Curtis Dubay, senior tax policy analyst with the conservative Heritage Foundation, said there's "little chance of approval this year" because it is an election year and "because it will be easily recognized as making matters worse than better."

Read a comparison of the presidential candidates' tax reform plans.

William Gale, co-director of the nonpartisan Tax Policy Center, said today's proposal shows how difficult it will be to enact major corporate tax legislation, adding that taxation of business income in the United States is "very confusing and uneven."

"Some income is taxed twice, some once at the individual level but not the corporate level, some once at the corporate level but not the business level, some not at all," Gale said. "That unevenness in taxation across different uses of capital is not helpful to the economy."

The difficulties include moving beyond industry-specific subsidies, interest deductions, depreciation versus expensing, and the treatment of "pass-throughs" and partnerships, among other technical issues.

Geithner said he has spoken to Sen. Max Baucus, D-Mont., who is chairman of the Finance Committee, Sen. Orrin Hatch, R-Utah, the committee's ranking Republican, and Rep. Sander Levin, D-Mich., saying they plan to meet next week to build consensus.

"A key test of any reform should be whether the net impact of the changes improves the incentives for investing in the United States," Geithner said.

The president has said corporate tax reform is necessary to increase the competitiveness of the U.S. economy and maximize investment and growth.

"As I said in the State of the Union, it is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America," the president said in a statement after Geithner's briefing.

Geithner shared five key elements of the president's proposals. In addition to eliminating loopholes to lower the corporate tax rate from 35 percent and proposing a minimum tax on foreign earnings, the other three elements were strengthening manufacturing and innovation, including reducing the effective rate on manufacturing to no more than 25 percent; simplifying and cutting taxes for small businesses; and implementing the changes without adding to the deficit.

Scott Brown, chief economist with Raymond James, said there is broad agreement for fundamental tax overhaul.

"As a broad tax reform plan, there's a lot to like," Brown said. "But the devil is in the details, which aren't there."

Many firms would be unwilling to exchange their tax breaks and loopholes for a lower tax rate, Brown said, "but it depends on the specific numbers, which weren't included in this proposal."

The proposals to expand the tax credit for research and development and to lower the maximum tax rate for manufacturers to 25 percent should be helpful for the economy, Brown said. But he said the lower corporate tax rate is unlikely to get much traction in Congress.

Beyond the scope of this proposal, he said there are significant fiscal policy restraints in 2013 as the Bush tax cuts expire, the payroll tax reduction ends and spending cuts take effect, as a result of the failure of the so-called super committee to reach a consensus before Thanksgiving.

"Most likely, we'll see efforts to extend tax cuts and limit spending cuts after the election," Brown said.

Regarding industry-specific incentives, Gale said he preferred a system that taxes non-renewable energy over the proposed renewable energy subsidy, and he was not in favor of the manufacturing deduction.

"A subsidy to any one particular area is the equivalent of a net tax increase on everyone else," he said, adding that the administration's framework is "very good" on that score generally, removing a whole range of subsidies.

"I don't think that manufacturing merits special treatment, from an economic viewpoint," Gale said. "And from a political viewpoint, I am worried that once one starts introducing special treatment of one area of the economy, it undermines the case that other areas shouldn't also get special treatment."

The Heritage Foundation's Dubay said the president's plan does not lower the corporate tax rate enough, saying the United States is one of the few countries that taxes its businesses on income they earn in foreign markets.

Republican presidential candidates Rick Santorum, Ron Paul and Newt Gingrich each said they would make the statutory rate even lower, cutting it to 17.5, 15 and 12.5 percent, respectively.

"The plan reduces the rate but makes things a lot worse for international businesses," Dubay said, citing the proposed minimum tax on foreign earnings.

Tax policy now provides a deferral so companies are taxed when they bring money earned abroad back to the United States.

Gale of the Tax Policy Center said reducing the corporate rate to 28 percent would get the United States more in line with other countries.

A senior administration official said "it's very difficult" to go below 28 percent while maintaining some tax incentives for U.S. economic interests.

ABC News' Devin Dwyer contributed to this report.