By Kim Dixon and Rachelle Younglai
WASHINGTON (Reuters) - President Barack Obama made an opening offer in what could be a long negotiation with corporate America on Wednesday, putting forward his first detailed plan to cut the corporate tax rate.
Though it has little chance of becoming law in an election year with Congress paralyzed over fiscal issues, the plan shows Obama's intent to favor domestic over offshore manufacturing and to broaden the tax base by closing corporate tax loopholes.
As lawmakers look to 2013 for the next chance to tackle a comprehensive tax code overhaul, Obama's plan also puts him in approximate alignment with the major Republican presidential challengers, minimizing corporate taxes as a campaign issue.
The president proposed cutting the top corporate rate to 28 percent from 35 percent, addressing a long-standing gripe by U.S. corporations that the rate is too high. It ranks as the second-highest in the developed world, trailing only Japan.
"Our current corporate tax system is outdated, unfair, and inefficient," Obama said in a statement.
"It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world ... It's not right, and it needs to change," he said.
Republican presidential hopeful Mitt Romney on Wednesday unveiled tax proposals of his own, calling for capping the individual income tax rate at 28 percent, down from 35 percent, and slashing the corporate rate to 25 percent.
Some U.S. companies pay close to the 35 percent top corporate tax rate; some pay nowhere near that, thanks to tax breaks that let them lower their "effective" tax rates.
Of the 30 companies that make up the Dow Jones industrial average, 19 told shareholders that their effective tax rate for their 2011 fiscal years (mostly ending December 31) was lower than Obama's proposed new tax rate.
Of these companies, three - telecom company AT&T, Bank of America, and insurance company Travelers - posted a tax gain. For the other 27 companies in the index, the effective tax rates reported ranged from 2.7 percent for telecom company Verizon Communications to 43.3 percent for oil producer Chevron Corp. These figures are taxes for shareholder accounting but not necessarily what was paid last year because Congress lets companies defer parts of their income tax for future years.
"We are only at the starting point of corporate tax reform, and the road is a long one," said Martin Sullivan, an editor for Tax Analysts and a former U.S. Treasury Department staff member.
The last major rewrite of the tax code came in 1986 under Republican President Ronald Reagan, who raised corporate taxes.
Since then, the U.S. tax code has become riddled with deductions, exemptions and loopholes, each one defended by interest groups in Washington with hefty lobbying budgets.
Obama's plan was immediately criticized as inadequate by numerous business groups, while others said the plan was a step in the right direction, but short on details.
Complicating any tax reform effort are congressional and presidential elections in November, as well as deep divisions in Congress that have prevented lawmakers from dealing effectively with tax and budget issues for many months.
Analyst Greg Valliere of Potomac Research Group called the timing of the Obama plan's release a "cynical ploy" to the extent it overshadowed Romney's plan. The Obama plan "has virtually no chance of winning enactment this year," he said.
Romney, the former governor of Massachusetts, on Wednesday proposed a tax overhaul that he said would cut Americans' tax rates by 20 percent and limit deductions for the wealthy.
His plan included some standard Republican wish list items, such as reducing the top corporate tax rate to 25 percent, eliminating the inheritance tax and repealing the alternative minimum tax. Romney also proposed some limits on tax deductions.
Republican rival Rick Santorum would cut the top corporate tax rate to 17.5 percent and exempt manufacturers from paying it entirely. Newt Gingrich would cut it to 12.5 percent.
U.S. MANUFACTURERS FAVORED
Obama last week unveiled a $3.8 trillion budget-and-tax proposal that called for aggressive government spending to boost the economy and for higher taxes on the rich.
On Wednesday, he signed into law a bill passed last week by Congress that extends long-term jobless benefits along with a payroll tax cut for 160 million workers that runs through the end of 2012.
The payroll tax cut expiry will coincide with several other fiscal shocks: expiration of tax cuts enacted under President George W. Bush; $1.2 trillion in automatic budget cuts across the government imposed as part of last year's deal to raise the debt ceiling; another likely encounter with the debt ceiling; the need to renew "temporary" tax measures; and another necessary adjustment of the alternative minimum tax.
The confluence of these events, each weighted with potentially major economic impact, could unleash new momentum for comprehensive tax reform, but for now proposals along these lines will largely amount to political messaging, analysts said.
The Obama plan tries to reverse tax incentives for corporations to relocate jobs and research overseas, while giving domestic manufacturing operations bigger tax breaks.
In a new twist targeting companies that stash profits abroad to avoid paying U.S. taxes, the president proposes slapping a minimum tax on corporate profits earned in low-tax countries, though his plan did not spell out a rate.
One tax break targeted in the Obama plan is the "carried interest" loophole that lets managers of private equity and some other funds pay the 15 percent capital gains tax rate on much of their earnings instead of the 35 percent top income tax rate.
The plan also takes aim at accelerated depreciation, a major tax break enjoyed by many companies, but details were scarce.
Business groups were likely to oppose many elements of the Obama plan, including keeping the current system for taxing U.S. corporations' foreign profits. Big multinational companies have been lobbying for a tax holiday, known as repatriation, on profits earned abroad, but this is missing from the proposal.
A senior administration official said repatriation might be reconsidered as part of the give-and-take when negotiating details with lawmakers in a transition to a new tax system.
Manufacturing is given special status in the plan, including an expanded credit and making permanent a research credit.
Still, the president of the National Association of Manufacturers, Jay Timmons, said that while it appreciates the effort, many elements "completely miss the mark."
(Writing by Kevin Drawbaugh and Kim Dixon; Additional reporting by Steve Holland, Patrick Temple-West and Lindsay Dunsmuir; Editing by Howard Goller and Eric Walsh)