Tax Reform Questions for Treasury Secretary Geithner to Ask of Business Leaders Tomorrow

Lowering corporate tax rates to make U.S. multinationals more competitive abroad is one way President Obama may improve his standing with business. Tomorrow, Treasury Secretary Tim Geithner will meet with top business leaders to explore this possibility. President Obama may address the issue in his January 25 State of the Union Address and in his February 7 speech to the U.S. Chamber of Commerce. Here are some questions that I hope Mr. Geithner would ask.

1. How much do you want to lower the top corporate tax rate? Our current 35% top federal rate plus our 4.1% average state tax rate is the highest in the world along with that of Japan as shown in this Tax Foundation table based upon OECD data. Our European trading partners have comparable rates ranging from 30% to 34%, so we would have to lower our rate by at least 5% points to become comparable. U.S. multinationals overwhelmingly support lowering our corporate tax rates.

2. Should we move to a territorial tax system? That would allow U.S. companies to repatriate dividends tax free. This is how almost all of our trading partners operate, so in some sense it would “level the playing field” with foreign competitors. However, as discussed in this Joint Committee on Taxation analysis (See pages 21-49.), there would be plenty of winners and losers depending upon how expenses are allocated, particularly R&D, and how much royalty payments are paid overseas. There are several conflicting studies on the effects of moving to a territorial system. Most U.S. multinationals support the idea, so they must believe they would be better off. Whether that would translate into increased U.S. employment is unclear.

3. Are you willing to accept the broader tax base implied by your previous answers? Given our deficits of 9% of GDP, any tax reform would have to be revenue neutral. So whatever tax cut arises from moving to a territorial system and from lower the rates would have to be offset by the repeal of tax breaks. President Obama has already proposed over $440 b. FY11-FY20 of business tax reforms, which would be a logical place to start. Here’s a detailed description, and be sure to look at the revenue tables at the end. This would convert a lot of winners to losers and possibly scuttle the effort.

4. Could we lower corporate tax rates without lowering individual tax rates? The last major tax reform we had in 1986 raised corporate taxes significantly to pay for lowering the top individual income tax rate to 28%. It’s a stretch to think Congress could get away with lowering business tax rates without lowering individual tax rates. Business leaders are in no mood to finance individual tax reform again. There are plenty of individual tax breaks that could be repealed to finance a lowering of individual tax rates, but most are concentrated in deductions for health insurance, mortage interest, and charitable contributions, all politically potent groups.

This will be a closed door meeting. It will be interesting to see what statements, if any, are made afterward.

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About Pete Davis 99 Articles

Affiliation: Davis Capital Investment Ideas

Pete Davis advises Wall Street money managers on Washington policy developments that affect the financial markets. President of his own consulting firm since 1992, Davis Capital Investment Ideas, he draws on 11 years of experience as a Capitol Hill economist with the Joint Committee on Taxation (1974-1981), the Senate Budget Committee (1981-1983), and Senator Robert C. Byrd (1992). He worked in the House and Senate, and for Republicans and Democrats.

Davis brought the first computer policy model, the Treasury Individual Income Tax Model, to Capitol Hill in early 1974, when he became a revenue estimator on the Joint Committee on Taxation. He formulated the 1975 rebate, the earned income tax credit, the 1976 estate tax rates, the 1978 marginal tax rates, and the Roth-Kemp tax cut. He left Capitol Hill in 1983 for the Washington Research Office of Prudential-Bache Securities, where he advised investors for seven years.

Davis has long written a newsletter on the Washington-Wall Street connection for his clients; Capital Gains and Games is his first foray into the blogosphere.

Visit: Capital Gains and Games

1 Comment on Tax Reform Questions for Treasury Secretary Geithner to Ask of Business Leaders Tomorrow

  1. About 50% of corporate taxes are paid by the shareholders. Academic studies show the other half falls on employees (reduced compensation) and consumers (higher prices). The middle class pays enough taxes. Therefore, my comprehensive tax proposal does away with corporate taxes as part of middle-class tax relief. Instead of a corporate tax, the shareholders are taxed directly….

    Any solution to the deficit and tax reform misses the mark unless it addresses this shameful fact: Billionaire Warren Buffett pays 11% total (federal, state, local, corporate) taxes on $8 billion annual investment gains while a single minimum wage worker pays 30% total taxes on her $14,500 annual salary ( The recent tax deal amounts to $74,000 to each top 2% household compared to $5200 for an average bottom 98% household.

    The favored tax treatment for wealthy investors started by Reagan 30 years ago led to the the share of the nation’s wealth held by the top 1% of households jumping from 22 to 40%. It also led to investment bubbles, a 25% drop in our GDP growth over 30 years, and thus our last two recessions (in which everyone – except the rich who benefited from the tax breaks – risks losing their jobs, homes and pensions).

    See for a truly fair, economy-fixing, nation-saving tax reform proposal, that would slash the deficit and save middle-class households thousands of dollars each year.

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