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President Obama Calls for Tax Reform in His State of the Union Address

Tax

By Ron Kramer

In his State of the Union address on January 25, President Obama called for both fundamental reform of the U.S. corporate tax system and for simplification of the tax code as it relates to individuals.

In his address, the President said, “Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.”

The President asked for Democrats and Republicans to simplify the system. He said, “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years -- without adding to our deficit. It can be done.”

In December 2010, the Bipartisan National Commission on Fiscal Responsibility and Reform (the Debt Commission) recommended that the U.S. corporate tax rate be set at a single corporate rate of between 23% and 29% to replace the current multiple bracket (with a top rate of 35%) system. The Debt Commission recommended that the corporate rate reduction be accomplished by closing loopholes and moving to a more territorial tax system. The Obama administration has indicated that it will continue to attack perceived tax breaks for businesses that operate internationally as a means to lower corporate tax rates.
Also, in his remarks on energy policy, President Obama urged Congress to eliminate $4-billion-per-year in tax subsidies for oil, gas and other fossil fuel producers and to put the revenue toward clean-energy technology.

President Obama also offered a popular fix to the health care reform legislation. In his remarks, the President indicated his support of the repeal of the Form 1099 requirements for payments to corporations beginning in 2012, which small businesses strongly oppose as an unnecessary paperwork burden. Ahead of the President’s address, Democratic Senators Max Baucus and Harry Reid introduced a bill in the Senate to repeal the perceived onerous 1099 requirements. Thus, even if Senate Republicans aren’t successful in having the entire health care legislation repealed, the repeal of the 1099 requirements appears to be a near term certainty.

President Obama also urged Congress to simplify the individual income tax code. President Obama stated, “In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed an interest in doing this, and I am prepared to join them.”

In his address, President Obama also reiterated his desire to end the extension of the high-income tax cuts as a means of reducing the deficit. Obama suggested, “And if we truly care about our deficit, we simply can’t afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools or scholarships away from our students, we should ask millionaires to give up their tax break. It’s not a matter of punishing their success. It’s about promoting America’s success.”

GOP leaders have also expressed their intent to address tax reform during the 112th Congress. The GOP has suggested that Congress could work on a bipartisan plan that should focus on broadening the tax base and lowering the corporate tax rate to make the tax code more internationally competitive and more supportive of small businesses. We’ll see how tax reform progresses as Congress wrestles with getting spending and the deficit under control. 

For further information, please contact Ron Kramer, Tax Advisory Services, at (412) 697-5356 or rkramer@schneiderdowns.com.

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