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.

Instead of divulging details, the president called for reforming the "burdensome corporate tax rate" and a fairer distribution of taxes. He said some industries' tax burdens are four or five times higher than other industries and that companies are making too many decisions based on their tax implications.

"We need something smarter, something simpler, something fairer," said the president.

Sen. Robert Menendez, D-N.J., has led Finance Committee hearings in an attempt to begin the overhaul process, but called for cooperation not just in lowering corporate taxes, but for tax code simplification for individuals.

"A dreaded day is coming: tax day -- complete with needless forms, confusing instructions, and piles of paperwork. New Jersey's middle class families deserve better," said Menendez in a statement. "Real reform will wake millions of Americans up from this nightmare, eliminate special deals, and lower taxes for hardworking families and small businesses. That's not a fantasy land, that's real tax reform based on common sense."

In other parts of Capitol Hill, other groups are weighing in on the discussion.

Tonight, five lawmakers are expected to participate in the "first ever" Tea Party town hall and lower taxes are among the issues most likely to be discussed. The event, hosted by the Tea Party Express and TeaPartyHD.com, will feature an "interactive dialogue" between Sens. Orrin Hatch, R-Utah, Rand Paul, R-Ky., Mike Lee, R-Utah, Reps. Michele Bachmann, R-Minn., Steve King, R-Iiowa, and a 70-member audience. The town hall, at the National Press Club in Washington, D.C., will also feature pre-submitted questions to the lawmakers through YouTube.

Levi Russell, communications director for the Tea Party Express, said his organization encourages tax reform though Tea Party members are debating about how to reform the tax code much like members of Congress. He said he does not have a timeline by which Congress and the White House would actually implement tax reform.

"We advocate for changes in code that encourage small businesses and investment and lead to growing jobs and stimulating the economy," said Russell. "Our standpoint is that we push to get the right people in office and trust their judgement. We're willing to give members the freedom to make the right decision without telling them how to do their jobs day by day."

The House Ways and Means committee is also trying to move the discussion forward by hosting a series of hearings entitled "Fundamental Tax Reform." The committee held their first meeting on Jan. 20. Michelle Dimarob, a senior advisor for the committee, said upcoming hearings will be announced soon.

"We are at the beginning of a dialogue," wrote Dimarob in an e-mail. She said the input of the committee, Congress, the White House and "most of all, the input of the American people" will guide the discussion about tax reform.

The road ahead to tax reform promises to be a long one. According to the Government Accountability Office, in 2009 the US Tax Code was over 67,000 pages long.