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Obama's corporate tax proposal would close and open loopholes

WASHINGTON -- President Barack Obama wants to close dozens of loopholes that let some companies pay little or nothing in taxes. But he also wants to open new ones for manufacturers and companies that invest in clean energy.

To some analysts, the new loopholes risk upending the level playing field Obama says he wants to create.

Some also fear that companies could game the system to grab the new tax breaks.

"The administration is not making sense," says Martin Sullivan, contributing editor at publisher Tax Analysts. "The whole idea of corporate tax reform is to get rid of loopholes, and this plan is adding loopholes back in."

Economists across the political spectrum support a kind of grand bargain: Cut corporate tax rates while deleting tax breaks that benefit a favored few.

The plan, rolled out Wednesday, goes a long way toward that. It would lower the official corporate tax rate from 35 percent to 28 percent. And it would eliminate many loopholes.

But the plan would give manufacturers new tax breaks that would cut their effective tax rate to no more than 25 percent.

Other economists oppose another part of the plan: a minimum tax on foreign earnings of U.S. multinational companies. No other country imposes such a tax on its companies, they note. U.S. businesses would face a competitive disadvantage.

Facing resistance from Republicans and many businesses, Obama's plan is in any case a long-shot proposal so close to Election Day.

Just about everybody agrees something has to change. When Japan implements a corporate tax cut in April, the U.S. will be left with the highest corporate tax rate in the developed world. (Many U.S. companies effectively pay lower rates because of tax breaks.)

The loophole-riddled U.S. tax code now benefits many industries over others. One tax break, for example, lets oil companies write off drilling costs immediately instead of over time, as most businesses must.

In the end, different industries can pay far different effective rates. The Treasury Department says U.S. utility companies pay an average effective tax rate of 14 percent. In contrast, retailers pay an average 31 percent.

The administration says the point of its tax plan is to give corporations a more competitive tax rate and to make the system fairer and more efficient -- not to squeeze more overall tax revenue from corporations.