By Michael Cipriano
Treasury Secretary Jacob J. Lew came to the Brookings Institution a confident man on Wednesday.
Speaking to a group of around 100 professionals, journalists and students, Lew said he is optimistic that Congress and President Obama will work together to reform what he called the “dysfunctional” U.S. tax system.
The former White House chief of staff said he believes the odds are “better than 50-50” that new business tax legislation will be enacted before the president’s second term ends.
“The message from the American people over the last few weeks and months has been clear,” Lew said. “They want their leaders in Washington to find common ground, to compromise and to get things done, and I believe that message has been received.”
“While our views on individual tax reform may be far apart, there is a broad set of business tax reforms on which we should be able to agree,” Lew added.
Lew said that one of the biggest problems with the nation’s tax code is that it is “far too complicated,” particularly for small businesses. He pointed to an estimate suggesting that a small business on average devotes hundreds of hours and thousands of dollars to comply with the tax code.
“Too many investment decisions are shaped by tax considerations when they should be driven by what will best enhance productivity and growth,” Lew said. “Our tax code should favor the best businesses that create the most economic value, not those that are best at taking advantage of tax deductions.”
What’s more, Lew slammed the system’s special interest loopholes and deductions that result in widely disparate effective tax rates. He noted that producers from the oil and gas industries are rewarded with special interest tax breaks that unfairly reduce their taxes compared to other industries, including retail and manufacturing.
He added that the tax code drives businesses to shift their operations overseas, as those who do not utilize loopholes could pay the highest rate in the developed world.
“The current tax system makes it too hard for businesses to launch, grow and invest in the United States,” Lew said. “It is too hard for businesses to create the middle class jobs our country needs, and it is too hard for United States businesses to compete with businesses headquartered overseas.”
The treasury secretary also mentioned the Obama administration’s plan to reform the business tax code, which the president briefly discussed in his State of the Union address on Tuesday night. The plan includes cutting corporate tax rates – including lowering the top rate from 35 percent to 28 percent – and closing wasteful loopholes.
“This will make our business tax system competitive, fundamentally fair and fiscally responsible,” Lew said.
“This rate is in line with our trading partners, and will help encourage investment in the United States. As we broaden the tax base, we can also create more certainty, and make simpler and more efficient.”
A second part of the plan involves fixing the backward international tax rules by eliminating parts of the system that encourage companies to shift income and investments overseas.
The president’s proposal, Lew says, would create a new minimum tax on foreign earnings, making it easier for a business to bring profits back to the United States. It would also tighten the rules so that companies cannot use accounting techniques to avoid paying taxes – such as shifting profits to low-tax countries – and eliminate tax deductions that reward companies when they shut down operations in the United States and move abroad.
Lew added that the plan would provide tax breaks for companies that bring production back to the U.S.
“With these changes in place, we can help encourage investment in the United States,” he said.
While the treasury secretary said he remained confident that the two sides could find common ground in the president’s proposals, members of the audience were more skeptical. In a question-and-answer session following the speech, one audience member asked why anybody should trust Congress to accomplish anything, given its unproductive reputation.
Lew countered and said the 113th Congress got more done than people remember, citing agreements on the Patty Murray (D-Wash.) and Paul Ryan (R-Wis.) budget deal, a farm bill and a water research bill.
The response drew a few laughs from the crowd, but he nevertheless remained optimistic that a deal will get done.
“There clearly were some bad moments in terms of brinksmanship that I hope we don’t go back to,” Lew said.
“I am confident that as long as we keep our focus on doing what is right for our economy and our nation, we will get this done.”