President Weighing Corporate Tax Cuts

By Peter Baker
The Washington Post

Thursday 09 August 2007

President Bush said yesterday that he is considering a fresh plan to cut tax rates for U.S. corporations to make them more competitive around the world, an initiative that could further inflame a battle with the Democratic Congress over spending and taxes and help define the remainder of his tenure.

Advisers presented Bush with a series of ideas to restructure corporate taxes, possibly eliminating narrowly targeted breaks to pay for a broader, across-the-board rate cut. In an interview with a small group of journalists afterward, Bush said he was "inclined" to send a corporate tax package to Congress, although he expressed uncertainty about its political viability.

The president's comments came as he tried to calm volatile stock and mortgage markets and reassure the country that the economy is fundamentally strong. Despite mounting concern over the downturn in the housing market, he rejected proposals advanced by prominent Democrats to grant government-chartered Fannie Mae and Freddie Mac more freedom to buy mortgages and mortgage-backed securities. And he ruled out any taxpayer bailout of lenders threatened by the subprime home-loan crisis.

In a 48-minute conversation on an array of economic issues, Bush also warned China not to start a trade war, blamed Congress for not doing more to shore up infrastructure such as the bridge that collapsed in Minneapolis last week, and pushed back against Democratic presidential candidates who are promising to renegotiate the North American Free Trade Agreement.

The focus on economic issues on Bush's last day in Washington before leaving town today for most of the rest of the month reflected a White House strategy to confront Democrats on tax and spending issues. With most of his second-term domestic legislative agenda in tatters and his strategy in Iraq under bipartisan fire, Bush appears eager to return to familiar issues that animated the beginning of his presidency and might rally disaffected Republicans behind him again.

Appearing before cameras at the Treasury Department alongside his economic team, the president vowed to veto spending bills that exceed his targets and he accused Democrats of proposing the largest tax increase in history to fund an additional $205 billion in discretionary spending over five years.

"It's about $1,300 in higher spending every second of every minute of every hour of every day of every year for the next five years," he said. "Now, somebody is going to have to pay for it. And that, of course, will be the hardworking American people. . . . I will use the veto to keep your taxes low and to keep federal spending under control."

Democrats quickly returned fire, noting that Bush inherited a surplus that turned into a deficit and that he never vetoed a spending bill during the six years that Republicans controlled Capitol Hill, even as the budget grew by 50 percent.

"After six years of reckless spending in Washington, President Bush is the last person who should brag about fiscal responsibility," said House Speaker Nancy Pelosi (D-Calif.). She accused the president of misrepresenting Democratic spending plans, which she said come in lower than his and have received some Republican support. And she said Bush wants "to spend $2,800 each second . . . to keep our troops in the middle of a civil war in Iraq."

Bush did not mention his potential plan to cut corporate tax rates during his televised statement, but he discussed it in response to questions during the later session with reporters. The idea would again put him at odds with Democrats at a time when they are talking about letting his first-term tax cuts expire for the wealthiest Americans. Rather than just defending his past program, Bush seems interested in pushing the tax issue further to the fore.

Treasury Secretary Henry M. Paulson Jr. briefed Bush yesterday morning on various possibilities for overhauling a corporate tax structure that he considers disadvantageous for U.S. business. A paper Paulson released last month said the corporate tax rate could be reduced from 35 percent to 27 percent by scrapping the research-and-development tax credit, a deduction for domestic production, breaks for interest on state and local bonds, and other special tax breaks.

The administration said the U.S. corporate tax rate, once modest compared with international competitors, is now second only to Japan's among 30 member states in the Organization for Economic Cooperation and Development. Moreover, officials said, Germany, France, Japan, Britain and China have signaled that they will or may cut their rates.

"Our tax structure makes us less competitive, and if we want to be a competitive nation, we've got to analyze a lot of things, including taxes, dependence on oil or good education policy," Bush said. "And so we will work through possible suggestions for Congress."

But he acknowledged that changing the tax code is "a tough issue" and may not be possible. Bush once envisioned using his second term to overhaul the overall tax code and commissioned a task force to develop a proposal. But the plan it came up with proved so politically unpalatable that Bush shelved it.

Now he is focusing strictly on the corporate side of the code. A "determinant factor" in deciding whether to go forward, he said, will be whether advisers can craft a revenue-neutral plan, neither raising nor decreasing overall taxes.

"There's a chance that we may be able to devise a simplification that will enable us to have a tax code that is more competitive," Bush said. He added: "Will we be in a position of developing a legislative package that has a credible chance of succeeding? I don't know yet, because we've just started the discussions. I'm inclined to want to push hard, but I've got to know: Push hard on what?"

On housing, Bush said he is concerned but hopes the market will find "a soft landing" without substantial government intervention beyond enforcing existing policies on predatory lending. "Somebody said, 'Should we be using taxpayer money to bail out lenders?' And the answer is: No, we shouldn't be. The market will work." Instead, he said, policymakers should focus on ways to help people who might lose their houses to refinance, and he called on Congress to change the Federal Housing Administration.

Bush threw cold water on proposals to have Fannie Mae and Freddie Mac come to the rescue: "The first thing we back is reforming these entities. It's time to get them to focus on their core business in the first place. And we put forth a reform plan. . . . Let's get them reformed first, and now is the time to get it done."

Some analysts argue that Fannie Mae and Freddie Mac already have the ability to pump more money into the troubled mortgage markets. Instead of buying more mortgages, they could package them into securities for sale to other investors, and the backing of the government-chartered firms could give investors the confidence to buy the securities, analysts say.

Sen. Charles E. Schumer (D-N.Y.), a member of the Senate banking committee, said some on Wall Street are "on the edge of being panicked" about mortgage markets. "There's a prominent notion that the regulators should get together and do something," he said. "And a good number of people think Fannie and Freddie are the answer, including some very conservative people."

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said if Fannie Mae and Freddie Mae owned the mortgages or mortgage-backed securities, they would be better able than other investors to renegotiate terms to prevent borrowers from losing their houses.

Frank said it is the White House that has held up reform of the companies by opposing legislation the House passed this year to create a stronger regulator for Fannie Mae and Freddie Mac. The administration argues that the bill would not give regulators enough power.