TOPICS > Economy

President Obama Outlines Plan to Close Tax Loopholes, Raise U.S. Revenue

BY Admin  May 4, 2009 at 5:15 PM EST

President Obama and Tim Geithner; Getty/AFP photo

The president expressed his wishes to raise taxes on the
overseas profits of U.S. companies and to go after evaders who abuse offshore
tax shelters.

Listen to Treasury Secretary Timothy Geithner and President Obama discuss their tax plans:

Mr. Obama said the existing laws make it possible to
“pay lower taxes if you create a job in Bangalore, India, than if you
create one in Buffalo, N.Y. “

The White House estimated the plan would inject $21 billion a
year into U.S. coffers over the next decade, but that would amount to only
about 2 percent of next year’s projected deficit of $1.2 trillion, however.

Under existing laws, companies with operations overseas pay
U.S. taxes only if they bring the profits back to the United States. As long as
those earnings are plowed back into the foreign subsidiaries, they can defer
paying taxes indefinitely. The president’s plan, which would take effect in
2011, would change that.

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, according to media reports.

Critics say those rules encourage businesses to bolster
foreign operations instead of creating jobs in the U.S. During his campaign
last year, Mr. Obama promised to change those provisions.

Drew Lyon, a tax expert at PriceWaterhouse Coopers, told
Reuters the changes to the “deferral” provision would be sweeping,
since half of multinationals firms’ income is earned abroad.

“It’s really hitting most Fortune 100 companies that
depend to a great deal on growth of foreign markets for growing their total
earnings,” Lyon said.

The president also said he would close loopholes and bolster
enforcement to prevent tax avoidance by companies and individuals.

“The steps I am announcing today will help us deal with
some of the more egregious examples of what is wrong with our tax code,”
he said at a joint announcement with Treasury Secretary Timothy Geithner.

Democratic Montana Sen. Max Baucus, chair of the Senate
Finance Committee that writes tax legislation, offered a tepid response to the
president’s proposals, signaling that they could be a hard sell in Congress.

“Further study is needed to assess the impact of this
plan on U.S. businesses,” he said Baucus. “I want to make certain
that our tax policies are fair and support the global competitiveness of U.S.
businesses.”

But several
lawmakers, including House Ways and Means Chairman Charles Rangel, signaled
support for Mr. Obama’s proposals.

In March, 200 companies and trade groups like the U.S.
Chamber of Commerce sent congressional leaders a letter opposing changes to the
“deferral” provision. The letter said the firms would not be on a
level playing field with international rivals, many of which are not required
to pay taxes at home on overseas entities. Pfizer, Oracle, Microsoft Corp,
Johnson & Johnson and General Electric were among the firms that signed the
letter.

Under President Obama’s 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.

The president said the government also is hiring nearly 800
new IRS agents to enforce the U.S. tax code.

In addition to the changes to the deferral provisions,
separate proposals in Mr. Obama’s plan would raise $95 billion by cracking down
on overseas tax havens. Such tax havens became a major topic at the April
meeting in London of leaders of the Group of 20 major economies.

In one of the proposals to crack down on tax evasion, the
administration would require financial institutions to share information with
the IRS about customers in the U.S. Foreign institutions and sign up with the
IRS to become “a qualified intermediary” or else face a presumption
that they are helping individuals evade taxes.

Some consumer advocates said the changes were long overdue
fixes for tax abuses.

Swiss banking giant UBS AG acknowledged in February that it
helped U.S. clients conceal assets from their government. It agreed to pay a
$780 million fine and has since identified about 320 of its American clients.

But the administration is not seeking to repeal all overseas
tax benefits. Mr. Obama called his proposal “a down payment 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 president said the current tax code makes it too easy
for “a small number of individuals and companies to abuse overseas tax
havens to avoid paying any taxes at all.”

He 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.

Geithner 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.”

He called them “common-sense changes designed to
restore balance to our tax code.”