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For Corporate Tax Overhaul, Big Risks, Big Rewards

If there were any question that a top-to-bottom rewrite of the tax system was on the agenda for 2013, it was removed late Tuesday, when news leaked that the White House had offered to accelerate an overhaul of the corporate tax system as part of a larger deficit reduction agreement.

The White House proposal completed a picture on corporate taxes that has been coming into focus over the past two years as business groups have argued for changes in the structure for corporate taxes while the issue has been overshadowed by the larger attention on individual tax rates.

President Barack Obama’s decision to include a corporate tax overhaul in the broader fiscal cliff discussions may not sway many Americans on the differences between the parties on those big tax and spending issues, but it’s dear to the businesses the White House has been trying to win over.

“The National Retail Federation and our members have long advocated for comprehensive tax reform that includes broadening the base and lowering rates so that American businesses, which pay the highest corporate tax rates in the world, can compete on a level playing field in the global marketplace,” Matthew Shay, president and CEO of the retailers’ group, said after word of the White House offer came out.

But with an enormous stake in the outcome of any tax system alterations for businesses, the group also wants the changes made in a considered, deliberate way — that gets corporations the lower tax bills they argue lead to greater investment and expansion.

“If Congress and the administration are serious about reforming our uncompetitive tax system, it’s critically important that the plan is discussed openly and in detail, with every stakeholder, and should be just one part of a broader approach to reforming the long term fiscal situation of the U.S. economy,” Shay said.

That suggests that a major battle over a corporate tax overhaul is waiting in the wings next year, if lawmakers back away from the fiscal cliff in the coming weeks.

Right now, if Obama has his way, upper-bracket tax rates on the income of individuals and couples will be allowed to go up on schedule at the end of the year. Then, in 2013, Congress and the administration will set about trying to scale back various deductions and credits for individuals and businesses, raising enough revenue to both lower tax rates for individuals and businesses and reduce the deficit further.

The idea that corporate taxes could be thrown into the mix in 2013 was not entirely unexpected, and it did not immediately win over House Republicans, who would be in charge of rewriting the tax code next year, largely because their broader objections to Obama’s negotiating posture still stand.

“Everything [Obama] wants, he wants now,” said Rep. Wally Herger, a California Republican on the tax writing House Ways and Means Committee. “Everything that would be some kind of negotiation or a compromise he wants to give us mañana.”

Another senior Ways and Means member, Rep. Pat Tiberi, R-Ohio, laughed when asked about the latest White House offer to include a corporate tax overhaul. “It’s just hard to know what the president really thinks,” he said.

Yet Republicans have reason to be heartened by the offer. A complete overhaul of the tax code has been a party priority since the start of the 112th Congress. Speaker John A. Boehner, R-Ohio, and Ways and Means Chairman Dave Camp, R-Mich., entered the fiscal cliff negotiations with the president aiming to get his commitment to a tax package that goes beyond raising rates and revenue, and they appear to be making progress on that front.

In an interview with CBS News on Wednesday morning, Camp echoed concerns expressed by other Republicans, but nonetheless said that the president’s movement on the corporate tax issue was “encouraging.”

Longtime Objectives

In fact, Obama has been talking about corporate taxes for some time. He first pledged to reduce the corporate tax rate and eliminate special preferences in his 2011 State of the Union address. A promised blueprint to achieve his goals was finally offered about a year later.

Until now, however, Obama had not said when he planned to tackle a corporate tax overhaul, suggesting only that it was something that he would like to accomplish in his second term.

For many lawmakers, the underlying reason for changing corporate taxes is the globalization that has so fundamentally altered the business landscape, creating competition between companies around the globe.

Like many political figures on both sides of the aisle, Obama has expressed concern that the U.S. corporate tax rate, at 35 percent, is a drag on the economy because it is the highest in the industrialized world. His blueprint would lower the rate to 28 percent but would pay for the rate reduction by eliminating tax breaks many businesses use to reduce an effective tax burden that brings down the final tax liabilities for companies.

The plan the administration unveiled in February would raise an additional $250 billion over 10 years, and it carries other goals the White House would like to achieve.

“Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base,” the White House said in a statement on its plan.

According to the administration, the options for raising revenue include limiting the deductibility of interest tied to the debt held by businesses and requiring companies to write off the cost of their depreciable assets over a longer period than is now required.

Both changes would have a substantial impact on a wide range of industries and are a clear indication that a corporate tax overhaul would not be easy and would not necessarily win support from every sector in the business world.

Some types of businesses benefit significantly more from the current tax code than others and thus have different views of the administration’s proposals. Representatives of the oil and gas industry have strongly signaled, for instance, they would like keep the system as it is — with its menu of breaks for companies in that field — while retailers are among the strongest backers of the administration’s efforts.

One drawback of paying for a lower corporate tax rate by broadening the corporate tax base is that it could have a negative effect on businesses that don’t pay the corporate tax but instead have their profits taxed as the personal income of their owners. Republican lawmakers frequently cite this problem, using it to make the case that the top individual income tax rate should also come down below 30 percent.

Particularly after his re-election, there is almost no chance that Obama would embrace such a policy, even if he does accept some rate reduction next year as part of a full-scale rewrite. Instead, his corporate tax blueprint would attempt to compensate small businesses for any damage done to them by handing them other perks, such as the ability to fully deduct more of their assets in the year that they are purchased.

Beneath the political rhetoric going at full-volume at the moment are the many other tricky policy questions that Republicans and Democrats would have to resolve if they are serious about working together on an overhaul.

On the business side, one of the biggest questions is how to treat the foreign income of multinational businesses.

In broad terms, Republicans support a move to a “territorial” tax system which would tax “active income” earned by businesses overseas at a much lower rate. Obama has proposed taxing offshore profits at an unspecified minimum rate.

Officially, the administration opposes a territorial system. However, Treasury Secretary Timothy F. Geithner has said the policy is worth exploring.

For that reason, and because Republicans have been open to some administration ideas about cracking down on offshore tax avoidance, some tax experts argue the two sides might have more in common than is generally assumed.

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