Jan 19, 2011

Businesses, White House Still Far Apart On Tax Overhaul

By Martin Vaughan, Wall Street Journal

January 19, 2011

U.S. businesses and the White House remain far apart on how to approach a corporate tax overhaul, with the tax debate on Capitol Hill set to kick off Thursday.

President Barack Obama has made overtures to business leaders on working together on a tax code rewrite. Chief financial officers of more than a dozen firms met Friday with Treasury Secretary Tim Geithner on the topic.

At that meeting, people briefed on discussions said, Geithner repeated a point he has made publicly that any tax overhaul should be “revenue-neutral”–that is, while tax rates may go down, the amount of revenue generated from corporate taxes, should not.

Business leaders say they are willing to talk about giving up some current tax breaks in exchange for a lower rate. But they aren’t embracing “revenue-neutral” reform, preferring to talk about “fiscally responsible” reform where overall revenue from the corporate tax system may go down at least in the short term.

“Going out there and just asking for a reduction in the corporate tax rate is clearly not the right answer. I think business leaders are on board with being more fiscally responsible,” Frank Calderoni, chief financial officer of Cisco Systems Inc. (CSCO), said in an interview.

At the same time, Calderoni said, a strict revenue-neutral approach, like the administration favors, doesn’t take into account the increased economic activity that a lower corporate tax rate would produce. “You can’t just take it and go through a scoring exercise,” he said.

Another key friction point emerging is the desire of the largest U.S. companies for a territorial tax system–one that doesn’t tax profits earned outside of the U.S.

At a Thursday hearing of the House Ways and Means Committee, Procter & Gamble Co. (PG) President and Chief Executive Robert McDonald will make the case that the U.S. world-wide tax is increasingly out of step with the tax systems in other developed economies.

“The tilted playing field created by the U.S. tax system hurts the competitiveness of American companies in the world’s markets both at home and abroad,” according to prepared testimony for McDonald, who will speak on behalf of the Business Roundtable.

Democrats argue that the U.S. tax system already resembles a territorial system in that much income earned abroad isn’t taxed on a current basis. The key difference is that firms can’t bring those profits back to the U.S. without paying a tax.

In separate testimony before Ways and Means, Martin A. Sullivan, an economist and contributing editor to Tax Analysts news service, will argue that the current system creates too many opportunities to shelter taxes abroad and creates winners and losers among U.S. companies.

Drug maker Merck & Co. (MRK) paid federal taxes at a 12.5% rate over a three-year average, while CVS Caremark Corp. (CVS) paid 38.8%, according to Sullivan’s testimony.

Sullivan will argue that when looking for ways to broaden the tax base, Congress should first repeal incentives for foreign investment before cutting incentives for domestic investment, like the research and development credit.

Part of the reason companies don’t want to embrace the “revenue-neutral” concept is that there simply aren’t enough loopholes in the code to pay for the kind of a rate reduction they are looking for.

Even if Congress repealed most of the largest tax benefits used by corporations–including research credits and deductions; deferral benefits for overseas profits; the deduction for domestic manufacturing; the last-in, first-out method of accounting; and accelerated depreciation–that would only pave the way to cut the rate to 30%, from the current 35% rate, in 2011. That is according to Dow Jones analysis using December estimates from the Congressional Joint Committee on Taxation.

Some business officials say rates would have to get down to around 25% to win enthusiastic support for an overhaul.