On July 30, 2013, President Obama laid out items he would like to see as part of tax reform. A lot of pieces are missing, but given some of the things he said, such as lowering the corporate tax rate, bringing jobs back to the US, helping manufacturers, and simplification, I think he is likely talking about parts of the revenue items in his budget proposals of recent years and his tax reform frameworks.

Here is a summary the President is recommending from the White House website:

 

Simplify Tax Code For Business

• End incentives to ship jobs overseas

• Lower tax rates for businesses that create jobs in the U.S.

• Lower tax rates for manufacturers

• Cut taxes for small businesses

Create Good Jobs

• Put construction workers on the job rebuilding our infrastructure

• Expand our network of high-tech manufacturing hubs

• Strengthen job training at community colleges

• Raise the minimum wage

President Obama stated he would like to see tax reform paired with funds for spending to improve our infrastructure. It is not clear how he will lower the corporate tax rate and generate funds – at least from what he said on July 30. If you look at his FY2013 and FY2014 budgets, you’ll see he can generate a lot of funds from increasing taxes of high income taxpayers (over $250K). That includes cutting back on the tax benefit of itemized deductions and some exclusions, as well as implementing the “Buffett rule.” The first item is the biggest revenue generator – about $40 billion per year. That’s a lot compared to about $7 billion per year for repealing LIFO. And repeal of LIFO is really a timing difference, the other is a permanent tax increase. (See page 343-344 of the Administration’s FY2014 Greenbook.)

We need more details. I’ll offer a few things to think about for now:

• Does he plan to lower only the corporate tax rates or also those for individuals? Most businesses operate outside of the corporate form. Also, to pay for the lower corporate tax rate, he’d have to reduce business breaks and that would affect all businesses (probably).

• It looks like he still wants to lower the corporate tax rate in a complex and not fully transparent way – by increasing the Section 199 manufacturing deduction for certain industries.

• Does everyone want a lower rate? Remember that only the top 1% of individuals are in the top rates. Even many large corporations today use existing tax rules to reduce their effective tax rate to below 25%. A recent poll of small businesses by the US Chamber of Commerce found that 56% wanted a simpler tax law and only 22% wanted lower rates.

• Revenue neutral reform to lower corporate and individual rates to 25% which many Republicans are talking about will be hard pressed to find revenue unless they go after the bigger tax expenditures, such as the one President Obama has suggested about capping the benefit of certain deductions and exclusions at 28% and reducing the mortgage interest deduction.

President Obama says he will lay out more details over the next few months. Sounds like a good strategy so he can gauge responses along the way and slowly try to build support.