Obama targets ‘loopholes’ for overseas operations

President Obama on Monday announced new details about his plans to crack down on tax loopholes for large corporations and wealthy individuals, the latest move by his administration sure to complicate an already troubled relationship with the business community.

“We are beginning to crack down on Americans who are bending or breaking the rules, and we’re helping to ensure that all Americans are contributing their fair share,” Mr. Obama said in remarks to reporters at the White House.

Treasury Secretary Timothy F. Geithner and Internal Revenue Service Commissioner Douglas Shulman appeared with the president, and Mr. Geithner said the tax breaks and loopholes being targeted are “indefensible.”

The steps, however, were greeted with strong condemnation by business and anti-tax groups, and one key senior Democratic leader gave tepid approval.

“Further study is needed to assess the impact of this plan on U.S. businesses,” said Senate Finance Committee Chairman Max Baucus, Montana Democrat, who said he does believe that the “corporate international tax system needs reforming.”

However, House Ways and Means Committee Chairman Charles B. Rangel, New York Democrat, applauded the proposal, saying it “will help millions of American families regain some of the economic security they lost in recent years.”

Going after companies and individuals who funnel money to tax havens in Cayman Island or Swiss banks is just one part of the proposal, though the IRS will be hiring 800 new employees “devoted to international enforcement.” Much of Mr. Obama’s plan aims to limit what the president considers the tax avoidance of multinational corporations who use subsidiaries and foreign branches to exploit multiple loopholes.

The White House, in a release detailing the plan, said the current tax system “is rife with opportunities to evade and avoid taxes through offshore tax havens.”

They said that 83 of the 100 largest U.S. corporations have subsidiaries in tax havens, citing a government report, and that in 2004 the largest corporations paid about $16 billion, or a tax rate of about 2.3 percent, on $700 billion in profits.

The plan, which requires congressional approval and would not go into effect until 2011, would raise $60 billion by 2019 by reducing the amount of foreign income that companies can avoid paying tax on indefinitely through a procedure called “deferral.” It would raise another $40 billion over the next 10 years by cracking down on inaccurate tax deductions made by U.S. companies based on taxes they pay in other countries.

The White House expects to bring in $86.5 billion in ten years through forcing U.S. companies to count foreign subsidiaries as separate entities, eliminating so-called “check the box” rules passed by Congress in the last decade that allowed corporations to “make their foreign subsidiaries ‘disappear’ for tax purposes,” according to the White House. Tightening enforcement against individuals who use tax havens would bring in $8.7 billion.

The net result is expected to bring in about $200 billion in extra revenue over the next decade, and the White House also believes the new measures will help them stop businesses from sending jobs overseas.

“Our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.,” the White House said.

Fiscal conservatives and anti-tax groups decried the plan, saying it will produce the opposite of what it intends to do.

“Obama’s proposal will shove jobs and capital out of America and into foreign countries,” said Americans for Tax Reform, pointing out that U.S. companies already pay a higher corporate tax rate of 40 percent domestically than in many other countries, and that forcing them to pay this rate on profits they make internationally will drive operations out of the country.

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