Obama Seeks To Close Overseas Tax Loophole President Obama sent a broadside Monday across the bow of those companies that now avoid taxes by keeping much of their business on the books of offshore subsidiaries. The practice is perfectly legal right now, but the White House wants that to change.
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NPR's Scott Horsley Reports On Obama's Plan

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Obama Seeks To Close Overseas Tax Loophole

Obama Seeks To Close Overseas Tax Loophole

NPR's Scott Horsley Reports On Obama's Plan

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President Obama sent a broadside Monday across the bow of those companies that now avoid taxes by keeping much of their business on the books of offshore subsidiaries. The practice is perfectly legal right now, but the White House wants that to change.

ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

MICHELE NORRIS, host:

And I'm Michele Norris. President Obama wants to make it harder for businesses and wealthy individuals to hide from the taxman. Today, the president proposed changes in the way multinational corporations are taxed. He's also promising a new, get-tough approach to offshore tax havens.

The president says his moves are intended to level the playing field for all taxpayers, but opponents say they would put U.S. firms at a disadvantage.

NPR's Scott Horsley reports.

SCOTT HORSLEY: President Obama called the proposed changes a down payment on a tax system that's simpler, fairer and more efficient. While the bulk of the new taxes would fall on multinational corporations, Mr. Obama took pains to say he's not being anti-business.

President BARACK OBAMA: Understand, one of the strengths of our economy is the global reach of our businesses, and I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens.

HORSLEY: Mr. Obama complains that under the current system, companies are allowed to put off paying taxes on their overseas profits indefinitely, but they're allowed to deduct U.S. expenses associated with those profits right away. In effect, he says, that makes investing in foreign operations more attractive than investing at home.

President OBAMA: It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.

HORSLEY: Under Mr. Obama's proposal, companies could still postpone taxes on foreign profits, but they'd lose their deduction for associated expenses. He also wants to make it harder for multinational firms to avoid taxes by parking profits in low tax countries.

All told, his proposals would generate an extra $210 billion for the government over the next decade. Big business was quick to cry foul.

Mr. JOHN CASTELLANI (President, Business Roundtable): President Obama's plan is the wrong idea at the wrong time for the wrong reason.

HORSLEY: John Castellani heads the Business Roundtable, which represents some of the largest U.S. companies.

Mr. CASTELLANI: The plan will reduce the ability of U.S. companies to compete in foreign markets. We believe it'll not only reduce jobs, but it'll also cripple economic growth here in the United States. It just couldn't have come at a worse time.

HORSLEY: The president's plan would not take effect until 2011, by which time the recession is expected to have eased, but that doesn't placate Castellani or other skeptics, such as senior fellow Gary Hufbauer of the Peterson Institute for International Economics. Hufbauer says eliminating the deduction on U.S. expenses associated with foreign profits would encourage multinationals to move more essential functions abroad.

Mr. GARY HUFBAUER (Senior Fellow, Peterson Institute): Those are the good jobs at good pay that American should want. I mean, do we want these headquarters' expenses to be incurred in Singapore or London?

HORSLEY: Hufbauer says most other countries don't even try to tax profits their multinationals earn elsewhere. He says by trying to level the playing field among firms here in the U.S., the Obama administration could end up tilting the field against American companies working globally.

Mr. HUFBAUER: The U.S. is already out of step with the norm in the world in terms of taxation of business, but this is a further big step away from the norm in a way that makes the U.S. less competitive.

HORSLEY: President Obama also wants to crack down on wealthy individuals trying to avoid taxes with offshore accounts. Under his proposal, those individuals and the banks that help them would face increased scrutiny.

President OBAMA: If financial institutions won't cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly.

HORSLEY: The president's budget also calls for hundreds of additional IRS agents to help enforce the rules. So far, lawmakers appear to be lukewarm about the president's plans. The chairman of the Senate Finance Committee, Max Baucus, said the president's proposals, quote, "set the table for tax reform," but Baucus says more study will be needed before he's ready to swallow what the president is serving up.

Scott Horsley, NPR News, Washington.

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Obama: Tax Haven Curbs To Generate $210 Billion

NPR's Scott Horsley Reports On Obama's Plan

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President Obama speaks at the White House about the tax code on Monday as Treasury Secretary Timothy Geithner looks on. Alex Wong/Getty Images hide caption

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Alex Wong/Getty Images

President Obama speaks at the White House about the tax code on Monday as Treasury Secretary Timothy Geithner looks on.

Alex Wong/Getty Images

President Obama vowed Monday to "detect and pursue" American tax evaders and go after their offshore tax shelters.

In announcing a series of steps aimed at overhauling the U.S. tax code, Obama complained that existing law makes it possible to "pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y."

The president said he wants to prevent U.S. companies from deferring tax payments by keeping profits in foreign countries rather than recording them at home, and called for more transparency in bank accounts that Americans hold in notorious tax havens like the Cayman Islands.

"If financial institutions won't cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly," Obama said.

The president, who hammered on this issue during his long campaign for the White House, said at a White House event that his plan would generate $210 billion in new taxes over 10 years and "make it easier" for companies to create jobs at home. Over a decade, $210 billion would make a modest dent in a federal deficit expected to swell to $1.2 trillion in 2010.

Under the plan, companies would not be able to write off domestic expenses for generating profits abroad. The goal is to reduce the incentive for U.S. companies to base all or part of their operations in other countries.

He said the government also is hiring nearly 800 new IRS agents to enforce the U.S. tax code.

Congress is expected to resist significant portions of Obama's plan. Opponents say the proposals would put U.S. firms at a disadvantage.

"The plan will reduce the ability of U.S. companies to compete in foreign markets," said John Castellani, who heads the Business Roundtable, which represents some of the largest U.S. companies. "We believe it will not only reduce jobs, but it will also cripple economic growth here in the United States. It just couldn't have come at a worse time."

Gary Hufbauer, a senior fellow with the Peterson Institute for International Economics, says eliminating the deduction on U.S. expenses associated with foreign profits would encourage multinationals to move more of their essential functions abroad.

"Those are the good jobs at good pay that America should want," Hufbauer said. "I mean, do we want these headquarters' expenses to be incurred in Singapore or London?"

The administration is not seeking to repeal all overseas tax benefits. Obama called his proposal "a down payment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations."

"Nobody likes paying taxes, particularly in times of economic stress," Obama said. "But most Americans meet their responsibilities because they understand that it's an obligation of citizenship, necessary to pay the costs of our common defense and our mutual well-being."

The current tax code, he said, makes it too easy for "a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all."

Obama said he was willing to make permanent a research tax credit that was to expire at the end of the year and is popular with businesses. Officials estimate that making the tax credits permanent would cost taxpayers $74.5 billion over the next decade.

But administration aides said 75 percent of those tax credits cover the cost of workers' wages.

Under existing laws, companies with operations overseas pay U.S. taxes only if they bring the profits back to the United States. If they keep the profits offshore, they can defer paying taxes indefinitely. Obama's plan, which would take effect in 2011, would change that.

Obama officials also said they would close a Clinton-era provision that would cost $87 billion over the next decade by letting U.S. companies "check the box" and treat international subsidiaries as mere branch offices. Officials said it was meant as a paperwork shortcut that is now a widely used and perfectly legal way to avoid paying billions in taxes on international operations.

Treasury Secretary Timothy Geithner said the proposals would end "indefensible tax breaks and loopholes which allow some companies and some well-off citizens to evade the rules that the rest of America lives by."

Geithner called them "common-sense changes designed to restore balance to our tax code."

The White House said that in 2004, multinational corporations enjoyed an effective tax rate of 2.3 percent in the United States because of such allowances. Aides said that was the most recent year available for analysis.

From NPR staff and wire reports