Treasury Secretary Tim Geithner at a Senate Finance Committee hearing. (Shirley Li/Medill)
WASHINGTON— President Obama’s corporate tax reform policy touting relief for the corporate and manufacturing sectors is taking a hit for failing to do just that. Critics in the business community fear the promised tax reductions for manufacturers, research and clean energy production are more of the same from the White House, advancing some sectors of the economy at the expense of others.
“The entire tax system should go and a new system should be put in place,” said Molly Brogan, the vice president of Public Affairs for the National Small Business Association.
Brogan said that although the administration is trying to “address where there are deficiencies,” she suspects the plan would simply create “winners and losers” without assisting the economy overall.
Obama’s tax reform policy, released last Wednesday, laid out a five-pronged plan centered on slashing the corporate tax rate from 35 percent to 28 percent. The administration’s other priorities include bolstering manufacturing, establishing a minimum tax on foreign investment, assisting small businesses, all of this while not adding to the deficit.
The White House plans to raise money to offset these cuts by eliminating subsidies and loopholes, including many for oil and gas companies. According to the joint report issued by the White House and the Treasury Department, these companies were taxed at an effective total marginal tax rate of 9 percent, drastically lower than the effective rates for other sectors of the economy. In the administration’s view, the sectors receiving preference under its plan provide more to the economy as a whole than oil and gas companies.
Obama’s proposal targets the manufacturing as a key piece to bolstering the American economy. The joint report states that manufacturing “conducts more than two-thirds of private sector research and development in the United States” and is responsible for almost 60 percent of total exports. Because manufacturing permeates many sectors of the economy, the White House believes that the emphasis could pick up the entire economy.
“Our view is that you need to prove that you have broader economy -wide spillovers that benefit not just your business, your company, your industry, but benefit the economy as a whole,” a senior administration official said. “The three clearest examples of that to us are manufacturing, research…and clean energy.”
While the current corporate federal tax rate is 35%, different industries paid varying rates due to subsidies or loopholes. This chart shows the effective federal corporate tax rates, the tax rate paid by companies after subsidies and loopholes are taken into account. (Source: U.S. Department of the Treasury, Office of Tax Analysis.)
Grinding the gears of manufacturers
Under the proposal, the administration plans to jump start American industries by capping the manufacturing income tax at 25 percent. While the 28 percent tax would still apply, the president’s plan strengthens the domestic production deduction to 10.7 percent for manufacturers, which lowers the effective manufacturing tax rate to a maximum of 25 percent. Additional deductions could be taken by advanced manufacturing to lower that tax cap even further. Taking into account the current deductions for domestic production, administration officials calculated the existing effective manufacturing tax as 31.85 percent.
But despite the manufacturing credits, Dorothy Coleman, the Vice President of the National Association of Manufacturers, fears that the plan doesn’t take into account the interconnected global economy. Credits going to the manufacturing sector will come at the expense of other businesses, she said, in the end creating no substantial net gain.
“We are concerned about things like the increased tax burden on companies with worldwide operation [like] oil and gas industry,” she said. “Because manufacturers use 1/3 of our nation’s energy, [this could] translate into increased energy costs for us.”
Manufacturers do agree with various parts of the president’s proposal, mainly the broad based corporate tax cuts which are supported by most business groups. The American Alliance of Manufacturing said that its members would withhold judgment on the plan until they could analyze its effects. But Executive Director Scott Paul said that any cut in the corporate tax rate is a positive for manufacturers and the economy at large.
Dorothy Coleman also applauded the White House for expanding the research and development tax credit for business expense deductions. But overall, the manufacturers association believes that broad reform is the key to economic success.
“Reform needs to help all business because that is what will truly raise the economy. Specifying one loophole or one tax policy over another doesn’t really help things,” said Matthew Lavoie, the press secretary for the National Association of Manufacturing. “Making things easier for businesses is critical to that job growth. “
The effects on mom and pop shops
The White House’s attempt to help small businesses has also been met with ambivalence, as small business owners are torn between helpful policies and what they believe Obama overlooked. As part of the plan, small businesses will be able to expense up to $1 million in investments to lower tax rates, raise the tax deduction associated with start-up costs for entrepreneurs and simplify the tax code for small businesses.
But the administration’s choice to reform only the corporate tax without corresponding changes to the individual tax has been met with opposition on Main Street. Molly Brogan, the spokeswoman for the National Small Business Association, said that since 83% of small businesses file faxes at the individual level, Obama’s plan has left out many of her members, despite some of the pro-small business language in the proposal.
“[For] the majority of small business, their marginal rates aren’t going to be changed all that much,” Brogan said. “If you are a small mom and pop whose struggling to make it and you are paying a significantly higher tax than Wal-Mart, that is wildly unfair.”
While the Obama administration agreed that individual tax reform is needed, Treasury Secretary Tim Geithner said the administration’s main focus this year is on the corporate tax rates.
“There are a lot of people who think that ultimately the realistic and best way to do this is alongside and together with comprehensive individual reform,” he said. “But we think it’s worth laying the foundation process now on the business income side.”
