Obama Renews Corporate Tax Reform Proposals

by Mike Godfrey, Tax-News.com, Washington

30 January 2014

In his State of the Union Address, which concentrated on policy areas where he could act without the passage of legislation through the divided United States Congress, President Barack Obama provided few new ideas on tax reform, but included the corporate tax cut arrangements he has proposed many times before.

Where he could work with Congress, he said, would be in "reforming business taxes and closing loopholes that help companies ship jobs overseas." President Obama again put forward the plan he has floated since 2012 – to eliminate corporate "tax loopholes" and provide for a minimum tax on foreign earnings, while lowering the top corporate tax rate from 35 percent to 28 percent.

"Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad," he said. "Let's flip that equation. Let's work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home."

Such proposals have already been discounted in the past, as, apart from making any reform provide additional revenue to increase infrastructure spending, they do not take account of small businesses, the majority of which pay their taxes at the individual income tax rate. Not only would they not benefit from the reduced corporate tax rate cut, but also, as business deductions would be eliminated at the same time, their taxes would effectively be raised.

In addition, the President continued to restrict his commitment to comprehensive tax reform, by insisting it should provide additional tax revenue for deficit reduction as supported by Democrats, in the knowledge that Republicans are looking for revenue-neutral reforms, with no overall increase in the level of taxation.

President Obama also looked to improve retirement savings in the US, albeit by taking away retirement tax breaks for the wealthiest at the same time. He pointed out that about half of all American workers do not have access to a workplace retirement savings plan, and that US "tax incentives mostly benefit high-income individuals already well-positioned for retirement, allowing them to reap tens of thousands of dollars more in tax breaks than middle-class families."

The President has re-proposed the establishment of automatic enrollment in individual retirement arrangements (or "auto-IRAs") for employees without access to a workplace savings plan, at the same time as "working with Congress to make sure that when we take steps to reform our tax code that we also reform upside-down retirement tax incentives."

He would also expand the Earned Income Tax Credit (EITC) to "benefit 15m families each year, providing an average tax cut of about USD800." He called on Congress to pass an increase in the EITC for workers without children, including non-custodial parents. While, currently, workers without children qualify for a maximum credit of about USD500, which phases out at very low incomes, the President "is proposing to encourage work and reduce poverty by raising the maximum credit and making the EITC available to more low-wage workers to provide a more meaningful work incentive."

Finally, with regard to foreign trade, President Obama pointed out that he is working towards an extended Trans-Pacific Partnership agreement and has launched talks toward a new comprehensive agreement with the European Union. He confirmed that, to aid completion of these treaties, he "wants to work with Congress to update its guidance and role in trade and pass Trade Promotion Authority legislation with the support of a broad coalition of both parties in Congress."