President Obama proposed detailed plans Monday to crack down on corporate tax loopholes, prompting a strong reaction from business groups, arguing that the president’s proposal went too far and would be too punitive on U.S. corporations.
The plan, described by Mr. Obama as a way to increase government revenue by $210 billion over the next decade, would not take effect until 2011 and has little chance of passing Congress this year. But the president said he was fulfilling a campaign promise by proposing it.
“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.”
While agreeing that tax evasion was a problem that needed to be addressed, the nation’s largest business and trade groups panned Mr. Obama’s plan.
But their measured responses illuminated the fine line that these organizations are walking as they try to remain at the bargaining table with a powerful and popular president with an eye toward the approaching negotiations over health care and energy reform.
“We’re not pleased with this proposal, but there are a lot of other issues. We’re working closely with the administration on health care reform, regulation reform and getting the economy going again,” said John J. Castellani, president of Business Roundtable. “It’s just unfortunate that this is the wrong idea at the wrong time for the wrong reasons.
“Hopefully it won’t spoil the cooperation on other issues. It certainly won’t on our end,” he said.
A key Democratic leader in Congress also gave a tepid response to the president’s presentation.
“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 added 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 the Cayman Islands 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 tax code loopholes.
The White House argued 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 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.
Mr. Obama said $74.5 billion, some of it coming from recovered tax revenues, would be used to make permanent a tax credit for business research and experimentation. The White House believes these new measures will encourage U.S. firms to curb the export of jobs overseas.
Fiscal conservatives and anti-tax groups countered that the Obama plan 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.
“It’s a relatively simple matter for a U.S. company with an Irish subsidiary to become an Irish company with a U.S. subsidiary,” the anti-tax group said.