REUTERS

WASHINGTON THE Obama administration on Wednesday will propose cutting the top tax rate for corporations to 28 percent, and pay for it by eliminating dozens of tax loopholes companies now use to lower their rates, a senior administration official said.

Chances of a deeply divided Congress revamping a tax system regarded as convoluted across the political spectrum seems remote in an election year, but the announcement is certain to fuel debate in the run-up to November’s elections.

The plan, over a year in the making, is President Barack Obama’s first official foray into overhauling the tax code, which most experts believe badly needs a revamp after years of being loaded up with special provisions.

The centrepiece is a cut in the top corporate rate - now at 35 percent, among the highest in the industrialised world. That will appeal to businesses, which gripe that the current US rate puts them at a competitive disadvantage.

Controversy will erupt when officials lay out which “loopholes” they want to cut.

The proposal makes a special carve-out for manufacturing - cutting that tax rate to 25 percent - and proposes a minimum tax on profits earned in low tax countries.

With deficits running about $1 trillion, the administration official said the plan will not “add a dime to the deficit.” That means any tax revamp will create winners, companies whose tax rates go down, and losers who now benefit from the very loopholes Obama wants to trim.

This will set up a fierce fight among lobbyists defending their tax breaks, when a proposal finally makes it to Congress for debate, which seems unlikely before November at the earliest.

Administration officials told reporters on Tuesday the Treasury Department would put out a corporate tax reform plan on Wednesday.

The Obama plan will follow such principles as “fairness” that the president set out in his State of the Union address to Congress last month, the officials said. After the presidential and congressional contests are decided in November, a number of major tax and budget issues will converge on Washington and new momentum for comprehensive tax reform may follow.

Treasury Secretary Timothy Geithner told a Senate committee last week that “dozens and dozens” of tax loopholes were being targeted for closure, but that some tax incentives would be kept for “creating and building stuff in the United States.” Analyst Greg Valliere of Potomac Research Group called the timing a “cynical ploy” given that Republican presidential hopeful Mitt Romney is expected to release his own tax reform plan shortly, as he struggles to fend off rival Rick Santorum for the Republican nomination to face Obama in November.