President Obama hopes to bring change to a loophole-ridden corporate tax code that allows potential tax dollars to slip through the cracks. In exchange, he's willing to lower the top rate to a level above what many corporations effectively pay today.
Obama announced a proposal Wednesday to overhaul the country's corporate tax structure. Under the terms of the new plan, the president will seek to eliminate many of the corporate tax breaks that American companies enjoy. Obama proposes lowering the top marginal corporate tax rate to 28 percent from the current 35 percent.
Members of the business community, for their part, have long maintained that America's corporate rate, nominally the highest in the world, should be lowered. But that 35 percent rate is more theory than practice. Studies indicate that after tax breaks, the effective corporate tax rate is in fact closer to 25 percent, and one analysis found that nearly 300 major companies paid an average rate of just 18.5 percent between 2008 and 2010.
The Obama administration hopes closing the loopholes will offset revenue lost from lowering the tax rate.
The question of how much companies should be expected to pay in taxes has taken on new urgency in the wake of last summer's debt ceiling crisis, which refocused attention on the federal budget deficit and moved lawmakers to begin looking for new ways to cut the government's costs or, in this case, reconfigure revenue streams.
Corporations employ a slew of strategies to minimize the amount they pay in taxes. Some companies park assets overseas where they can't be taxed, while others claim sizable deductions based on the stock option packages offered to their employees. Almost 70 percent of companies are structured in such a way that they don't pay any federal corporate income tax at all, instead passing along the burden to investors.
Thanks to these and other techniques, many companies clock in at a level far below the official 35 percent tax rate. In a three-year span from 2008 to 2010, the nonprofit group Citizens for Tax Justice found that there were 30 companies among the Fortune 500 -- including Verizon, General Electric, Wells Fargo and Boeing -- that paid nothing in federal income tax the entire time. More recently, analysts pointed out that Facebook's upcoming initial public offering is designed in such a way as to allow the company to sidestep taxes for 2011 and get half a billion dollars' worth of refunds for previous years.
In taking aim at corporate tax breaks, Obama could risk the displeasure of many large and politically influential companies. The firms that received the biggest tax breaks in 2009 -- among them ExxonMobil, Bank of America and General Electric -- were also among the biggest campaign contributors in the 2010 midterm elections.