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President Obama Urges Tax Reform in State of the Union

2 min readBy: Joseph Bishop-Henchman

In his State of the Union address last night, President Obama called both for reforming the corporate and individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. codes. On the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. :

But to help our companies compete, we also have to knock down barriers that stand in the way of their success.

For example, over the years, a parade of lobbyists has rigged the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.

So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years –- without adding to our deficit. It can be done.

The Administration has been hinting that they are interested in reducing the corporate income tax, although the Washington rumors were that it was more of a 2012 or 2013 thing. Such a prominent reference in this year’s annual message might have been instigated by news that Japan will be lowering its corporate income tax rate later this year, making the U.S. the highest corporate income tax rate in the industrialized world. (See the photo of a world corporate tax rate chart, prominently on the White House’s State of the Union webpage.)

The real question now is how to do it right. More on corporate income taxes here.

On the individual code:

In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed an interest in doing this, and I am prepared to join them.

National Taxpayer Advocate Nina Olsen recently described some of the major problems with the individual code. Read our posts here and here.