Obama tones down global company tax goals

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President Barack Obama has scaled back his ambitious plan to close loopholes global companies use when accounting for taxes on profit earned overseas, according to his 2011 budget blueprint released on Monday.

Obama, who has criticized corporations that keep profits overseas to avoid US tax, proposed changes he said would raise USD 122 billion over a decade, down from loophole-closers that last year he said would raise USD 210 billion over 10 years.

He had mentioned the issue in his State of the Union address last week. "To encourage these (energy and manufacturing companies) and other businesses to stay within our borders, it's time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America."

His plan last year drew a lukewarm response from Congress, even from his fellow Democrats, many of whom said the changes should be part of a broader overhaul of the tax code.

For a second year, the international tax aspects of his budget met with tepid enthusiasm from tax-writing committee leaders in Congress.

Senate Finance Committee Chairman Max Baucus praised some

points in Obama's budget but poured cold water on his immediate international tax ambitions.

"These policies are better addressed in the context of overall tax reform," he said in a statement.

A senior administration official seemed frustrated by congressional reaction, saying there was going to be a "reckoning" when policymakers would have to make tough decisions about raising money to bring down the deficit.

"This president has been willing to put tough choices on the table," said the official, who spoke during a background briefing with reporters.

The administration has sought to revise a policy that lets US-based multinational companies defer US tax on income earned abroad by stopping them from deducting most expenses associated with that income until it is recognized in the United States.

In his 2011 budget, Obama proposed to raise just USD 26 billion over a decade, by limiting deductions for interest expenses only.

Responding to industry

Noticeably absent from the president's latest budget proposal is a plan to revise rules that give companies power to "check a box" to avoid taxes when classifying foreign subsidiaries. Last year he said this would raise USD 87 billion over a decade.

Another senior administration official, speaking to reporters in a background briefing, said that after "engagement" with the business community, they decided to focus their efforts elsewhere.

Instead, the President wants to clamp down on so-called transfer pricing, where companies park intangible assets like copyrights or patents overseas to avoid higher US taxes.

Under the plan, the administration would regard as suspicious a company paying an effective tax rate of less than 10% with a rate of return of more than 30%, according to administration officials.

Companies and some economists argued Obama's earlier proposal could encourage industry to keep profit - and jobs - overseas.

"I think they are trying to be responsive to the concerns of some last year that they were going to encourage people to ship more jobs overseas," said Anne Mathias, an analyst with Concept Capital in Washington, which advises investors.

All told, Obama proposes to raise about USD 2 trillion in new taxes from the rich and corporations over a decade, including new funds for health care, ending tax breaks for oil and gas companies and the imposition of new "financial crisis responsibility fee" on financial institutions to raise about USD 90 billion over a decade.

Carried Interest, Dividends

From the wealthy, the budget seeks to raise nearly USD 1 trillion over a decade by letting tax cuts for individuals making more than USD 200,000 expire, among other changes.

In other areas of interest to Wall Street, Obama once again proposed taxing carried interest earned by hedge fund and private equity fund managers as ordinary income, which would boost the tax rate from 15% to typically the highest income bracket.

The change could raise USD 24 billion over a decade, according to the Administration.

The proposal passed in the House of Representatives but has hit a roadblock in the Senate.

The president again proposed raising taxes on dividends and long term capital gains for joint filers earning more than USD 250,000, from 15% to 20%. Such a move could raise USD 105 billion over a decade.

This issue will be taken up when Congress starts work on the individual tax cuts for all income groups enacted by former president George W. Bush, which expire at the end of this year.