WASHINGTON — Treasury Secretary Timothy Geithner said Wednesday the current U.S. business tax system is bad for business and for job-creation and argued that President Barack Obama's plan to reduce corporate tax rates to 28 percent would make the tax system more globally competitive.
The Obama administration is proposing to lower the corporate tax rate from the current 35 percent, the highest in the world after Japan. Manufacturers would receive incentives so that their effective tax rate could be even lower.
In turn, corporations would have to give up dozens of loopholes and subsidies that they now enjoy. Corporations with overseas operations would also face an unspecified minimum tax on their foreign earnings.
The proposal outlined by Geithner would also eliminate tax loopholes and subsidies that Geithner called "fundamentally unfair."
Obama also would set a minimum tax on the foreign earning of U.S. companies.
"We want to restore a system in which American businesses succeed or fail based on the products they make and the services they provide, not on the creativity of their tax engineers or the lobbyists they hire," Geithner said.
Chances of accomplishing such change in the tax system are slim in a year dominated mostly with presidential and congressional elections. But for Obama, the proposal is part of a larger tax plan that is central to his re-election strategy.
Geithner acknowledged that the debate "will be politically contentious."
"Some will say these proposals are too tough on business, and others will say that they're not tough enough," he said.
Obama's plan would be part of a larger effort to overhaul the U.S. tax system and it dovetails with Obama's call for raising taxes on millionaires and maintaining current rates on individuals making $200,000 or less.
While the 35 percent nominal corporate tax rate ranks among the highest, deductions, credits and exemptions allow many corporations to pay taxes at a much lower rate.
Under the framework proposed by the administration, the rate cuts, closed loopholes and the minimum tax on overseas earning would result in no increase to the deficit.
That means that many businesses that slip through loopholes or enjoy subsidies and pay an effective tax rate that is substantially less than the 35 percent corporate tax could end up paying more under Obama's plan. Others, however, would pay less while some would simply benefit from a more simplified system.
Reducing the corporate tax rate from 35 percent to 28 percent would reduce tax revenues by about $700 billion over the next decade, according to an estimate prepared in October by the Joint Committee on Taxation, the official scorekeeper for Congress.
That means lawmakers would have to find about $70 billion a year in tax increases to keep the package from adding to the budget deficit, hardly an easy task. In 2010, the corporate income tax raised a total of $278 billion, according to the Internal Revenue Service.
Geithner said the Obama plan aims to help U.S. businesses, especially manufacturers who face strong international competition. Obama's plan would lower the effective rate for manufacturers to 25 percent by offering other tax incentives that emphasize development of clean energy systems.
Many members of both parties have said they favor overhauling the nation's individual and corporate tax systems, which they complain have rates that are too high and are riddled with too many deductions.
The corporate tax debate has made its way into the presidential contest. Former Massachusetts Gov. Mitt Romney has called for a 25 percent rate, former House Speaker Newt Gingrich would cut the corporate tax rate to 12.5 percent, and former Sen. Rick Santorum would exempt domestic manufacturers from the corporate tax and halve the top rate for other businesses.
While Obama has been promoting various aspects of his economic agenda in personal appearances and speeches, the decision to leave the corporate tax plan to the Treasury Department to unveil signaled its lower priority.
What's more, the administration's framework leaves much for Congress to decide — a deliberate move by the administration to encourage negotiations but which also doesn't subject the plan to detailed scrutiny.
Obama's plan is not as ambitious as a House Republican proposal that would lower the corporate rate to 25 percent.
Still, Obama has said corporate tax rates are too high and has proposed eliminating tax breaks for American companies that move jobs and profits overseas. He also has proposed giving tax breaks to U.S. manufacturers, to firms that return jobs to this country and to companies that relocate to some communities that have lost big employers.
Geithner told a House committee last week that the administration wants to create more incentives for corporations to invest in the United States.
"We want to bring down the rate, and we think we can, to a level that's closer to the average of that of our major competitors," Geithner told the House Ways and Means Committee.
White House economic adviser Gene Sperling has advocated a minimum tax on global profits. Currently many corporations do not invest overseas profits in the United States to avoid the 35 percent tax rate.
Associated Press writers Martin Crutsinger and Stephen Ohlemacher contributed to this report.