The Obama administration takes its first concrete steps toward tax reform this Friday, when about 15 business executives are to join Treasury officials in the conference room of Secretary Timothy Geithner.
The executives, the chief financial officers of major companies like Disney, Procter & Gamble, Cisco and Caterpillar, will begin a ground-level discussion of overhauling corporate taxation. The administration has three conditions: that a revamped system enhance efficiency and economic growth, that it increases investment in the United States and, most consequentially, that it brings as much money as the old system.
“We’re going to launch a process around that,” Mr. Geithner said in an interview. The contours of that process, and its endpoint, remain hazy.
Few doubt that the current system meets the definition of dysfunction. The top tax rate, 35 percent, is uncompetitively high by international standards, and the base is narrow (only about half of business income is taxed).
But doing something about that situation presents complex economic, political and legislative challenges.
If a new system is “revenue-neutral,” giving some companies lower rates would hurt others by eliminating deductions that benefit them. That is a gigantic obstacle to the consensus among American companies and their lobbyists that may be required for the effort to succeed.
George W. Bush’s treasury secretary, Henry Paulson, pursued reform several years ago. So did the chairman of the House Ways and Means Committee at the time, Representative Charles B. Rangel of New York, before he lost his chairmanship to scandal and Democrats lost their majority.
Neither effort gained traction, and Mr. Geithner acknowledged that the Obama administration’s might not, either.
“We’re going to take a run at it,” he said. “How realistic the prospects are, we don’t know yet.”
The possibility of reforming the entire tax system has drawn increasing attention lately. Last month, a presidential deficit-reduction commission recommended cutting deductions and credits enough to reduce corporate and individual income tax rates to no more than 29 percent, from the current maximum of 35 percent.
A former budget director, Alice Rivlin, and a former Senator, Pete Domenici, leading another bipartisan panel, went further. They suggested a top rate of 27 percent for individuals and corporations, with a new 6.5 percent national sales tax to reduce the deficit and bolster the economy by discouraging consumption and encouraging investment.
The more ambitious the plan, however, the more difficult for a Democratic White House to strike a deal with Republicans in Congress. One Obama adviser, predicting the administration will ultimately shy away, called comprehensive tax reform “a good first date.”
Overhauling corporate taxes represents a more manageable challenge. The corporate tax represents about 2 percent of the economy, a quarter the size of the individual income tax.
The task also fits three near-term administration priorities: focusing on economic growth, cooperating with Republicans in Congress, and repairing relations with business.
Mr. Obama reflected those priorities in his most important post-election personnel move. As his next chief of staff, he hired former Commerce Secretary William Daley — a bread-and-butter Chicago Democrat who worked across party lines to help President Clinton expand trade and more recently worked for JP Morgan Chase.
As Mr. Daley begins work this week, the administration’s exploration of corporate tax reform reflects those priorities in one of its first policy initiatives of 2011.
Wall Streets’ View
Yet Mr. Daley’s background as an executive at a huge financial-service firm also embodies the political challenge of a corporate tax overhaul. Wall Street firms would be among the biggest beneficiaries of a rewrite that curbs deductions and lowers rates.
That is because, after accounting for deductions under the current system, financial institutions pay comparatively high “effective” rates, about 30 percent, the Treasury estimates. They would not be hurt by the loss of some of the costliest current deductions, like accelerated depreciation for capital equipment or the deduction for domestic goods production, as many other businesses would.
But major manufacturing firms, which have far more political champions than Wall Street does, would suffer, and have vowed to fight changes that harm them.
“We’d be opposed to a system where the base is broadened on the backs of manufacturers,” said Dorothy Coleman, a vice president of the National Association of Manufacturers. “That’s a deal breaker.”
The United States Chamber of Commerce, which, like the National Association of Manufacturers, welcomes the start of a tax- reform conversation, raised another issue. A corporate tax reform that lowered the rate below 35 percent would still leave higher taxes in place for some unincorporated firms, which account for half of all business income and whose owners pay under the individual tax system.
That factor alone could delay any tax-reform consensus until after the 2012 presidential election. And it only hints at the complexities to surface beginning with this week’s meeting at the Treasury.
Participants “are all going to support the concept,” Mr. Geithner said. But when corporations decide whether to back a specific plan, he added, “it’s all about the price.”