Why we don’t need corporate tax "overhaul":
by Linda Beale
Why we don’t need corporate tax “overhaul”
GOP poormouthing on behalf of rich corporate allies(Part I in a series) These days, one hears a great deal from politicians on the right about how a corporate tax “overhaul” is needed because our taxes are “too complex” and/or “too anti-competitive” or because our tax rates are “too high”. The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)–so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections–even though the corporate entities have no vote. Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.
Just a couple of examples from a recent Bloomberg piece:
- Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies’ repatriated offshore profits–i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system–that will remedy “an inefficient and complex maze of tax preferences”. See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, Bloomberg.com (Feb. 1, 2012). Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they “pay[] a very steep tax bill if and when they choose to bring their money home.” Ludicrous. There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway. Further, the deferral they are allowed on active business income gives them the time value of money benefit. Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income–which is a kind of subsidy for offshoring that costs US jobs. And of course, as I’ve noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or “bought pols”?) will give them the tax break they have been lobbying for–so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want. Portman, of course, says he wants to “streamline” the corporate tax and lower the rate to 25%. We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%. If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate–probably around 10-15% instead of 20-25%. Of course, what the result will be–as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate–is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
- Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits.
Is there merit in this drumbeat of (lobbyist-induced) calls for “corporate tax overhaul legislation”? The simple answer is no.
On Complexity:
Most complexity in the code is there for one of two reasons.
The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists. One example is the so-called “domestic production activity deduction” that lowers the tax rate by 9% for most industries (even ones that don’t really produce anything) and 6% for natural resource extractive industries. There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power).
The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions–often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what “exchange” means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code’s clear textual provision on its head (look at the briefs for the defendant–or for that matter the lousy statutory interpretation in the district court opinions– in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply).
As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).
Complexity, in other words, is not an evil in itself. Sophisticated taxpayers aren’t harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating. There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.
On Competitiveness:
Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it. If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that “competitiveness” requires that they be allowed to do the same. Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits. In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.
Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels. And in fact that view of competition–that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions–would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.
Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies. There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.
On Rate Structures:
The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions. But the context for that act’s passage was quite different. Individuals were taxed at rates that were reasonably progressive–with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients). Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created. Thus, there was room for “base broadening” (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for “rate lowering” (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).
We are not in the same situation today. We have very high deficits because of an economic crisis caused by two interwoven problems–(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as “unmerited” “entitlements or costly and anti-competitive regulation of businesses that counters the “free market” that will ensure “growth and jobs”.
The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy. The result of the 40-year “reaganomics” effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so–for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations–should be paying taxes at HIGHER rates, not lower rates.
It should be noted that President Obama–who is at best a middle of the roader on tax issues–also is said to plan to propose an “overhaul of the U.S. corporate tax system” in connection with his budget plan for FY 2013 that involves lowering rates and base broadening. See Steven Sloan, Obama said to propose corporate tax overhaul next month, Businessweek.com (Feb. 2, 2012). Again–lowering the rate is a bad idea. Lowering the rate without base broadening is a stupid idea. But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot. The problem is that if Obama proposes such a reform, the GOP won’t support it unless the “base broadening” is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists. Thus this looks like another of those initiatives from the White House that play into the right’s agenda and do little to advance any progressive idea.
originally published at ataxingmatter
Only a leftist tax lawyer could write something this far off of reality.
And Reagan took office 30 years ago, not 40, but who is counting.
I’m not sure that you even understand your own argument.
“are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)”
If lowering the corporate income tax burden means that the tax system becomes more regressive then this means that we are lowering taxes on the high income earners (or raising it on low but that’s not the case here).
The implication of which is that corporate income tax is really paid by the shareholders in hte business either as a tax on their dividends (lowering the corporate income tax would reduce this tax) in in reducing capital gains from retained profits.
So, arguing that we make the tax system more regressive by lowering the corporate income tax is an admission that corporates themselves do not bear the burden of the corporate income tax but their shareholders do.
But then in hte same sentence we’ve got “the tax burden paid by highly profitable corporations”…..whch is a statement that it’s the corporations themselves which carry the burden of the corporate income tax.
Now, one or other of these statements could be true: that it’s the corporation or the shareholders that carry that burden. But it cannot be true that both do.
1) close corporate loopholes
2) lower marginal rates
3) hire lobbyists to restore loopholes
4) profit!
Save the rustbelt:
How about explaining what you mean by “this far off reality”. In which ways are the arguments invalid. I’ll admit to being human and making errors. Convince me.
(I suppose I date reaganomics 4 decades because the movement to treat government as the problem, deregulation, tax cuts, and privatization as the answer, and corporations as gods got started earlier. Reagan embodied it and made it into something that has acquired his name,. If you want to quibble and only count it as from the date of his election, so be it. Doesn’t make much difference to the argument.)
By lowering the tax burden on corporations, we give them more money to do other things with, just as by lowering the tax burden on “carried interest” partners we give them more money to do other things with. The point of corporate tax incidence is that there isn’t a one to one correspondence between the relief of the tax burden and the benefit to a particular group, it’s not that one can’t say that the corporate tax burden has gone up or down. Some of the relief to corporations of their tax burden may result in higher payouts to shareholders–or none of it may. Some of it may result in higher compensation payment to chief executives and other corporate high level managers (probably a good bit of it does). Those chief executives are also owners of course, so in those cases the benefit of the relief goes to two classes but is only one benefit. Some may go to suppliers (better contracts, quicker payments), some may go to lenders (fewer defaults in periodic and principal payments), some may go to workers (more and better jobs and benefits–seems like that doesn’t happen much now, but of course corporations CLAIM that is one of the wonderful benefits of reducing their tax burdens), some may go to communities (less scuttliing of a plant on one side of the street in order to get yet another tax benefit from a jurisdiction across the street, a favorite pastime of Walmarts), etc.
The more diffuse or uncertain the impact, the more clearly we know that the corpoate tax burden is little different from the individual tax burden. When you have more money, you use it in various ways, and the people who get a piece of the action are benefitted–the gardener you hire, the nanny you hire out of your salary, etc. We don’t call it “double taxation” because we all know that each successive recipient of the income is a taxpayer. It’s only when corporate entities are involved that people’s preset ideas (like the idea that “only real people are taxpayers”) get in the way of understanding the way the burden of taxes works. When you come down to it, most arguments to the effect that coroprations aren’t “really” taxpayers rest on the a priori conclusion that “only people are real taxpayers.” It’s circular and its silly, but it is the received wisdom of much of today’s discussion about corporate taxes.
Being able to talk about the fact that taxes distort decisions (they always do to some extent) or that various groups may from time to time be beneficiaries of tax reductions (they often are) isn’t the same thing as having certainty about the incidence of tax. It simply is not contradictory in the way you imply to talk about the corporate tax burden as borne by corporations.
Eightnine2718281828mu5 has it absolutely right. This has been a real part of corporate planning–if they can use the “base broadening” argument to get rates down, then they will use the “competitiveness” and “double taxation” arguments to get the base narrowed again. We can expect preferences to start being added about as soon as a base broadening, rate reducing statute gets passed. And of course there are all those “temporary” provisions that they argue for. Just pass this temporary stimulus for a year or two, and see what wonders it does. Then you can eliminate it, becdause that stimulus will have done so much for the economy. But of course, every year that the temporary provision starts to expire, the lobbying begins to extend it–first, to ease “transition”, then, because it is obviously a good idea to have it longer, then finally, because expectations are such that it “needs” to be made permanent. So since 1981, Congress has been extending the R&D credit, even though there’s no evidence (or even sufficient studies) that it expands US research activities and even though it has several times been extended to past years when it cannot possibly incentivize more US research.
Yes, 40 years because Reagon cut his teeth as governor of Calif. Those mean, unappreciative college kids had to have something done to teach them that his taxes were not going to pay for such insolence.
I heard that in 1991 or 2 it was in the 70’s % range that the rich would be audited. Now do to debt reduction, it’s down to 22% chance. You know this is the other side of the double edge sword whether it’s the rich or their corporations.
A leftist lawyer? lol. How about a rightist lawyer that betrays his country for capital?
Captial fetish is the death of country.
And the right wing rationale for lower taxes on the 1% (and the corporations they love) is forever shifting; if our shores were besieged by schools of laser-equipped sharks, they’d claim that lower taxes on CEO’s are the most effective laser-shark defense known to man.
The one I like is that the corporate heads say they are not hiring because of the “uncertainty” that taxes might go up. I am sure that they do say this, but they are lying. In any event, I say that we should remove the uncertainty and keep corporate taxes where they are and raise the individual rates so there is a reason to do business as a corporation and pay corporate tax rates. If only Obama had not bent over for Mitch McConnell a year ago on the Bush tax cuts we would be in a much different place today and I do not believe that the economy would be any worse off.
Terry, I tend to agree with you there. If you think back to when the Bush tax cuts were first rammed through in 2001, there was not even much public sentiment in favor of tax cuts–just the right wing rhetoric and the Grover Norquist power. So Congress passed a tax cut that most Americans didn’t think was needed and that Congress KNEW AT THE TIME IT PASSED would result in a big deficit. That led to the memorable comments by certain leaders on the right that “deficits don’t matter anymore.” Fast forward to the economy that has been wrecked by the impact of tax cuts, preemptive wars, and deregulated financialization that were the primary factors behind both higher US debt and higher US deficits, and suddenly the right is using the deficits as an excuse for cutting programs that are beneficial to the lower income folks amongst us, while STILL planning more tax cuts for corporations and for the wealthy. It doesn’t pass the smell test.
When you come down to it, most arguments to the effect that coroprations aren’t “really” taxpayers rest on the a priori conclusion that “only people are real taxpayers.” It’s circular and its silly, but it is the received wisdom of much of today’s discussion about corporate taxes.
Strange that you say that an obvious truth is circular and silly.
All taxes mean less money in the wallet of some live human being. So that’s where the incidence is: whose wallet gets lightened?
The other half of your argument seems to be that as the incidence is difficult to work out we shouldn’t bother. Which would be a bit of a suroprise to people like Sir Jmes Mirrlees who got his Nobel for his work on where taxes really fall and thus what should be a good tax system.
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