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Corporate Tax Rate Reduction In Obama Plan Would Fix Bush Manufacturing Loophole

Posted: 02/23/12 11:47 AM ET  |  Updated: 02/23/12 11:47 AM ET

Obama Bush Manufacturing

WASHINGTON -- The Obama administration's corporate tax rate overhaul received lukewarm reviews from economists for its promise of explicit corporate perks without corresponding details on how they would be paid for. But one particular provision aimed at boosting American manufacturing could serve as a silver lining to the proposal.

The Treasury Department said Wednesday that it hopes to reduce the overall corporate tax rate from 35 percent to 28 percent, but avoid losing any tax revenue by closing a host of unspecified loopholes that allow companies to avoid paying the full rate. But the deal would be slightly sweeter for companies that manufacture goods in the United States, with the Obama administration vowing to reduce the top rate to 25 percent.

Obama would bring down the rate for manufacturers by tweaking a tax break that is frequently touted by its proponents as the "manufacturing deduction," which allows companies to skirt some taxes on profits that come from producing goods in the United States.

"Anytime you're going to increase the deduction for manufacturing activity in the U.S., that's a good thing, that's an insourcing incentive," said Scott Paul, executive director of the Alliance for American Manufacturing, a coalition between the steelworkers' union and corporate manufacturers. "That's something that's going to encourage companies to produce things here in the United States."

Congress approved the manufacturing loophole during the early years of the George W. Bush presidency, but it is an extremely inefficient mechanism for encouraging domestic manufacturing. More than one-third of the total amount of money that corporations write-off under the loophole comes from non-manufacturing activities, according to the Center on Budget and Policy Priorities, a liberal-leaning think tank. Everything from financial services to filmmaking qualifies for the perk. According to the nonpartisan nonprofit group Citizens for Tax Justice, the entire manufacturing deduction costs the government about $163 billion every decade.

Many economists believe that American manufacturing is only tangentially related to tax policy, with trade agreements and the value of the dollar playing more significant roles -- one reason why Citizens for Tax Justice has advocated repealing the manufacturing deduction altogether. A strong dollar, for instance, makes it relatively inexpensive for companies to pay wages in foreign currencies, encouraging executives to send jobs abroad.

But insofar as tax policy does affect the manufacturing sector, a more narrowly tailored manufacturing deduction would be more efficient.

"If there is a sector that's deserving of any sort of tax relief within the corporate community, it's people who make stuff in this country and who employ people in this country," Paul said. "Clearly the deduction needed some reform ... I'm sure there will be complaints from various actors about that, but it's important."

The Treasury Department on Wednesday said it would use the savings from a more tightly focused deduction to increase the benefits for companies that make products in the United States. In its official plan, Treasury did not specify how it would narrow the deduction's scope, but during a Wednesday conference call with reporters, officials said that barring oil and gas companies from eligibility for the deduction would be one of several strategies it would pursue.

The Obama administration has proposed shutting out the oil industry from the manufacturing deduction before. Citizens for Tax Justice says doing so would save the government about $16 billion every decade.

In the past three years, 30 of the nation's largest corporations have paid zero federal income tax. Less than 10 percent of total U.S. tax revenue currently comes from businesses. For much of the 20th century, that number was closer to 30 percent. Relative to the size of the nation's economy, corporations currently enjoy their lowest overall tax burden since World War II. Several tax experts have criticized the administration for not aggressively pursuing a tax overhaul that would increase overall revenue from corporations. The administration said Wednesday that its primary tax focus is on improving the corporate code without adding to the deficit -- a goal experts say will be very difficult to accomplish with the significant rate cuts the Treasury is seeking to enact.

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