Hold Fire on Obama's Offshore Tax Proposal

By proposing to rein in offshore tax havens, President Obama has the right idea for fixing a huge flaw in the way companies are taxed.But that's just the first piece of the puzzle that he'll put together this year to overhaul business taxation.

At first blush -- and by measuring the high pitch and decibel level of the howls from business lobbyists -- it would be easy to conclude the proposal to crack down on offshore tax havens will have a rough time in Congress, particularly in the more pro-business Senate. But such judgments might be a tad premature.

Legislation on offshore tax havens won't be decided in a vacuum. Obama will push to tighten multiple aspects of business taxes, such as toughening worker classification rules, ending the domestic production deduction and eliminating some breaks for oil and gas firms. These proposals won't be any more popular with businesses than Obama's offshore tax plan, however, so he'll have to agree to some tax sweeteners that will offset at least some of the higher taxes caused by the closing of loopholes.

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What we aren't sure of yet is exactly how much Obama is willing to give business in return. His opening gambit was to offer a permanent extension of the research and development tax credit. A permanent RD credit is definitely on the business community's wish list and has broad support in Congress. Plus, proposing to reward businesses for spending money domestically on research activities is a nice juxtaposition to the plan to rein in the ability of corporations to defer tax on foreign income.

But it isn'tnearly enough, and it's hard to believe that Obama isn't prepared to cough up more. What many businesses, especially big firms, want is a deep cut in the 35% top corporate tax rate. Companies have been angling for a rate reduction for years, arguing that their taxes are among the highest for industrialized countries. Even the Democratic chairman of the House Ways and Means Committee agrees: Rep. Charles Rangel (D-NY) has said he favors dropping the rate to 30.5%.

Obama hasn't played that card yet, but eventually he'll have to if he wants a bill. So for now, take all of the business community's complaints about Obama's proposal on offshore tax havens with a grain of salt. It's only the first act in a much longer play that's likely to end with both sides getting something in the bargain.