World Crisis Online

President Barack Obama called on Congress to immediately embark on an overhaul of the US corporate tax code, as he laid out a $3,730bn budget request designed to bolster America’s standing in the global economy and start shrinking its large fiscal gap.

While signaling that tax reform could take several years, and was a painstakingly difficult process, the White House said it was necessary to transform a system that “makes our businesses and our economy less competitive as a whole”.

The budget proposal said the US should aim to eliminate special tax breaks and loopholes and use the savings to lower the corporate tax rate from its current level of 35 per cent – one of the highest in the developed world. But it said that any reform should not add to US budget deficits, which could prove to be a sticking point with the business community.

In addition, the administration did not offer any insight into which corporate tax incentives the White House would like to see cut, beyond certain tax breaks concerning oil and gas companies and overseas profits that had previously been proposed and roundly rejected by US multinationals. There was no hint of the US moving towards a system of territorial taxation that exempts international earnings – a priority for many large business groups. However, one key sweetener was introduced: a permanent extension of a tax credit for research and development

Mr Obama’s budget request for 2012 marks a shift from an economic and fiscal policy agenda focused on stimulating the US economic recovery to making targeted investments in certain areas while keeping government spending under control in order to start reducing budget deficits. In fact, it proposes cutting deficits by $1,100bn over the next decade, achieving a temporarily sustainable debt-to-gross domestic product ratio of 3.2 per cent by 2015. Eventually, however, America’s fiscal outlook would start deteriorating again because of the escalating costs of the largest government pension and healthcare programmes, which are not tackled in any significant way in the budget. These were addressed by a bipartisan fiscal commission set up by Mr Obama last year, which recommended much more sweeping deficit reduction, worth $3,900bn, over the next decade. But few of its proposals, with the exception of the call for corporate tax reform, were embraced by the administration in Monday’s budget.

The 216-page budget release marks the opening salvo in what is expected to be a series of fraught negotiations with congressional Republicans on fiscal matters. An extension of funding for the government is due in March, and an increase in the US debt limit, which is set by law, will need to be approved by the end of May at the latest to avoid a possible US default on its obligations.

“Even as we cut out things that we can afford to do without, we have a responsibility to invest in those areas that will have the biggest impact in our future,” Mr Obama said at an event in Baltimore on Monday. Republicans, who are seeking much deeper cuts in discretionary spending and many government agencies, beginning this year, slammed the proposal. “The White House still hasn’t gotten the message,” said Jim Jordan, head of the conservative Republican Study Committee in the House of Representatives. “Even as Americans are looking for Washington to cut back, president Obama wants to burden families and employers with higher taxes, more spending and more debt.”

In its budget, the Obama administration is seeking increases in funding levels for certain key agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission charged with implementing last year’s financial regulatory reform. But it is unclear whether these will be approved by Congress, since Republicans control the House of Representatives and opposed the Wall Street bill. But other portions of the discretionary spending budget will be subject to a five-year freeze that will save an estimated $400bn over the next decade.

In the budget, the administration renewed its attempt to levy a tax on the largest banks, with the “financial crisis responsibility fee” that would raise $30bn over 10 years from assessments on assets minus deposits.

A Treasury official said the fee had three purposes – to recoup taxpayer support to the industry given during the crisis, to match international efforts to levy taxes on the industry and to discourage institutions from carrying a lot of debt on their balance sheets.

Private equity executives and hedge fund managers whose income is taxed at the lower capital gains rate would have to pay tax at the higher income tax rate, raising $14.8bn over 10 years. Unlike a similar measure in last year’s budget, which failed to gain traction in Congress, non-financial partnerships such as dentists and farmers would not be subject to the rate increase.