WASHINGTON -- For years, U.S. businesses have been clamoring for Congress to wipe out a profusion of special-interest tax breaks and use the proceeds to lower the 35 percent tax on corporate profits, now the highest in the developed world. Last week, the Senate's chief tax writer rolled out a series of proposals to do just that.
But after one look at the potential trade-offs, businesses large and small have been reacting with alarm. "We certainly are not happy," said Dorothy Coleman, chief tax lobbyist for the National Association of Manufacturers. "There are certainly a lot of red flags in there that are really very concerning to us."
Part of the problem, Ms. Coleman and others said, is what's missing from the trio of "discussion drafts" offered by Senate Finance Committee chairman Max Baucus, D-Mont.
The proposals would end the practice of indefinitely deferring U.S. taxes on foreign earnings, impose an immediate 20 percent tax on roughly $2 trillion in profits accumulated overseas and sharply curtail businesses' ability to quickly deduct certain expenses, such as advertising.
But while Mr. Baucus released reams of paper detailing the potential pain of a tax overhaul, he has so far failed to give businesses a concrete idea of the potential pleasure. Mr. Baucus says his ideas will generate enough revenue to let him lower the 35 percent rate significantly, without losing money for the U.S. Treasury. But he has declined to propose a new rate, saying only that he is aiming to get it under 30 percent.
A specific rate is key to assessing the proposals, many tax lobbyists said. Mr. Baucus' House counterpart, Ways and Means chairman Dave Camp, R-Mich., has said he is aiming to push the corporate rate down to 25 percent, although he has yet to release full details of his tax plan.
President Barack Obama has set a corporate target of 28 percent, but the U.S. Treasury Department has offered only a sketchy plan to get there.
With the release last week of full-fledged legislative proposals, Mr. Baucus has advanced the tax overhaul a bit farther. But instead of pleasing the business community, his proposals may instead be serving as a wake-up call to the true cost of change, some tax analysts said.
Assuming that the rate ultimately winds up in the "high 20s or low 30s," Mr. Baucus' proposals would probably increase the tax burden on the foreign earnings of U.S.-based companies, said Marc Gerson, a tax expert at the Washington law firm of Miller & Chevalier. "Any way you slice it, you look at this and say there's going to be a higher tax burden on international operations."
Particularly worrisome to many companies: Mr. Baucus' proposal to automatically tax accumulated profits. Under current law, U.S. taxes on profits earned overseas can be deferred until those profits are brought home. As a result, many companies are parking billions of dollars in foreign accounts, in part to avoid U.S. taxation. But some of those profits have been legitimately reinvested in plants and equipment abroad, tax lobbyists said.