Three Loopholes Obama Wants To Close To Avoid Sequester

The outcome of the latest round of political brinkmanship over fiscal policy increasingly looks like it will hinge on whether Congress is ready to take on a subject it has studiously avoided for more than 25 years: corporate tax reform.

At his State of the Union address last week, and again on Tuesday, President Barack Obama said Congress must eliminate certain tax loopholes that benefit corporations and wealthy individuals in exchange for his support of a deal to avert $85 billion in mandatory budget cuts known as the "sequester."

The last time Congress overhauled the tax code was 1986. Since then, Congress has added in tax breaks and loopholes worth hundreds of billions of dollars to corporations that lobbied for them. Last week, The Huffington Post reported on the origins of one of those breaks, a "manufacturing" deduction that lobbyists stretched to encompass public utilities, oil companies and even coffee roasting.

So what perks, exactly, does Obama want to cut? The president has avoided going into much detail, but public statements and a recent White House policy paper suggest these likely priorities:

No More Amsterdam Sandwiches

Obama has called repeatedly for corporate reform that would stop multinationals from shipping profits overseas in order to avoid paying U.S. taxes. The policy paper, for example, proposed a minimum tax on offshore earnings to encourage domestic investment and "prevent a race to the bottom in corporate tax rates."

These aims hew closely to legislation recently introduced by Sen. Carl Levin, (D-Mich.) and Kent Conrad (D-N.D.) that would attempt to stop U.S. companies from shipping patents and other assets to offshore affiliates. One infamous technique, pioneered by Apple, is known as the "Double Irish With a Dutch Sandwich." The maneuver is complicated, but essentially it allows U.S. companies to move profits through Ireland, the Netherlands and then on to a tax haven in the Caribbean in order to lower the U.S. tax bill. Over the last three years, Apple, Google and Microsoft have used techniques like this to avoid paying taxes on $80 billion in profits over a three year period, a recent Senate subcommittee on investigations found.

Ending The "Facebook" Break

The U.S. tax code permits companies to deduct the cost stock options as an expense that reduces profits, just like cash compensation. According to Citizens for Tax Justice, in a report picked up by Bloomberg News, the stock options cashed in after the Facebook IPO will allow the company to claim a tax refund of $429 million.

So what's the problem? The tax code permits companies like Facebook to take stock option deductions in excess of expenses. So, for example, Facebook booked stock options given to founder Mark Zuckerberg at 6 cents per share, according to Levin. The company later claimed a deduction at about $40 per share. Moreover, Facebook can carry forward deductions -- and indeed, has an additional $2.17 billion that it can apply against future tax bills, Citizens for Tax Justice calculates.

This "excess" deduction, according to Levin's calculations, has cost the Treasury between $12 billion and $61 billion a year in lost revenue.

Make Mitt Pay More

As you no doubt have heard by now, former Republican presidential candidate Mitt Romney probably pays a lower effective tax rate than you. That's because of the "carried interest" rule, which allows private equity managers to to treat the fees they charge to manage a client's portfolio -- typically, a one-fifth share of any profits -- as investment income, subject to a lower 20 percent capital gains tax rate than the top 39.6 percent marginal rate.

Obama specifically mentioned the carried interest break on the campaign trail, and again in the run-up to the last fiscal cliff crisis, in December. Eliminating the perk, though, won't do much to ease the budget deficit. It costs Treasury about $1.3 billion a year.