President Barack Obama proposed Monday to raise taxes on the overseas profits of U.S. companies and to go after evaders who abuse offshore tax shelters.
In announcing a series of steps aimed at overhauling the U.S. tax code, Obama complained that existing law makes it possible to “pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York. “
The proposal will be a hard sell in Congress. Sen. Max Baucus of Montana, chairman of the tax-writing Senate Finance Committee, offered a tepid response.
“Further study is needed to assess the impact of this plan on U.S. businesses,” said Baucus, a Democrat. “I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses.”
The president said he wants to prevent U.S. companies from deferring tax payments by keeping profits in foreign countries rather than recording them at home and called for more transparency in bank accounts that Americans hold in notorious tax havens like the Cayman Islands.
“If financial institutions won’t cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly,” Obama said.
Many provisions of the complicated and much-maligned tax code in fact are worded in ways that allow people to legally cut corners. And the code is filled, likewise, with language that in many circumstances authorizes legal tax end-arounds, if not pure avoidance.
During much of his long campaign for the White House, Obama campaigned for an overhaul and simplication of the code. At the White House event Monday, he said his new proposals would generate an average of about $21 billion a year in new taxes. That would amount to only about 2 percent of next year’s projected deficit of $1.2 trillion, however.
Under his plan, companies would not be able to write off domestic expenses for generating profits abroad. The goal is to reduce the incentive for U.S. companies to base all or part of their operations in other countries.
Obama said the government also is hiring nearly 800 new IRS agents to enforce the U.S. tax code.
Congress is expected to resist significant portions of Obama’s plan.
The administration is not seeking to repeal all overseas tax benefits. Obama called his proposal “a downpayment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations.”
“Nobody likes paying taxes, particularly in times of economic stress,” he said. “But most Americans meet their responsibilities because they understand that it’s an obligation of citizenship, necessary to pay the costs of our common defense and our mutual well-being.”
The current tax code, Obama said, makes it too easy for “a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all.”
Obama said he was willing to make permanent a research tax credit that was to expire at the end of the year and is popular with businesses. Officials estimate that making the tax credits permanent would cost taxpayers $74.5 billion over the next decade.
But administration aides said 75 percent of those tax credits cover the cost of workers’ wages.
Under existing laws, companies with operations overseas pay U.S. taxes only if they bring the profits back to the United States. If they keep the profits offshore, they can defer paying taxes indefinitely. Obama’s plan, which would take effect in 2011, would change that.
Obama officials also said they would close a Clinton-era provision that would cost $87 billion over the next decade by letting U.S. companies “check the box” and treat international subsidiaries as mere branch offices. Officials said it was meant as a paperwork shortcut that is now a widely used and perfectly legal way to avoid paying billions in taxes on international operations.
Treasury Secretary Timothy Geithner joined Obama for the announcement. He said the proposals would end “indefensible tax breaks and loopholes which allow some companies and some well-off citizens to evade the rules that the rest of America lives by.”
Geithner called them “common-sense changes designed to restore balance to our tax code.”
The White House said that in 2004, multinational corporations enjoyed an effective tax rate of 2.3 percent in the United States because of such allowances. Aides said that was the most recent year available for analysis.
They said the situation was indefensible.
Copyright 2009 The Associated Press.