As Americans, we pay taxes to allow our government to support important activities that we as individuals or individual businesses either can’t do at all or can’t do as successfully. Both individuals and businesses benefit from government, so that paying taxes is a wonderful exercise in patriotism.
For individuals, the idea of paying taxes as patriotism may be obvious to many of us, because we think that taxes are an obligation of citizens to support and pay for the many things that the government does that we cannot do ourselves, from running a military defense system to supporting basic research into diseases, helping people and cities and states hit by natural disasters (like Texas and Florida and Puerto Rico), supporting education and research that leads to innovation and economic growth, helping to fund changeovers from dying industries like coal to new and growing industries like solar and wind, preserving areas of public lands for the public rather than allowing them to be decimated by private industry and fossil fuel extraction, preventing huge multinational companies from gouging consumers or polluting our water, land, and air, and the many other things that the government does for the benefit of all Americans.
But the far right in this country has been preaching the opposite for years.
- There’s a good bit of hypocrisy there, because when Sec. of Health Price (now fired) or current Sec. of Treasury Mnunchin or current EPA Director Scott Pruit wants a comfortable private ride (like Pruitt’s many trips back to Oklahoma to talk to industry magnates one-on-one without any public information, and then de-regulate on their behalf), they love that they can make a slim excuse and take a military jet at the cost of hundreds of thousands of U.S. taxpayer dollars. Or, like Pruitt, have a “sound-proof room” built for himself (first EPA administrator who thinks he needs it) so he can talk to his industry buddies about how to un-protect the environment without any Americans ever finding out about it.
- Far right media personalities have made a killing by arguing for tax cuts (that mostly benefit the rich like them) and government shrinkage (of programs that they think they won’t use).
- Grover Norquist wants taxes to be low because he wants to “shrink the government and drown it in a bathtub.” That idea has proliferated on the right to many of the programs that are directed to help the most vulnerable amongst us, such as Medicaid, and to programs that exist to help ensure the Americans of all ages and backgrounds enjoy the right to access to health care and decent standard of living in retirement, through Medicare and Social Security. Not surprisingly, Norquist has stated that including a VAT in the U.S. system would be “like shards of glass on a pizza” (see this link) –even though almost every developed country has a VAT as well as an income tax (which is one of the reasons that the comparisons of corporate tax rates is so misleading–it is comparing apples (only an income tax) to oranges (an income tax AND a VAT and usually other taxes as well, such as financial transaction taxes).
- Rush Limbaugh supports Trump’s tax-cuts-for-the rich ideas. See “What I was Told About the Trump Tax Plan–and What I Think About It“, The Rush Limbaugh Show (Sept. 28, 2017). He spouts one falsehood after another about them: that they are not trickle-down (of course they are), that they aren’t harmful for the poor (of course they are); that they will allow 99% of Americans to file their tax forms on a postcard just because the framework reduces the number of tax rates (absurd: reducing the number of tax rates has just about nothing to do with reducing the complexity of the Code for the vast majority of American taxpayers, who already file a simple form because they have mainly wage income that is withheld at the source). And no matter how much Rush Limbaugh claims that reducing the corporate tax rate, creating a low tax rate for partnership pass-through income, getting rid of the estate tax and getting rid of the AMT aren’t benefits for the rich (because, he says, Trump has insisted that the changes aren’t supposed to benefit him), the fact is that they are benefits for the rich and the Trump clan clearly will especially benefit, probably to the tune of hundreds of thousands annually and billions upon Trump’s death. Limbaugh is quite simply just plain wrong. Because, you see, although rates matter (and we should have a top tax rate much HIGHER than our current top tax rates), the changes that the GOP Six are proposing in the framework are specifically intended to, and do, provide enormous tax cuts to the ultra wealthy. That’s because the marginal statutory rate is just one piece–the real question is what gets taxed, i.e., how is the “taxable income” amount calculated and what special loopholes are built in to benefit the rich (like the 25% partnership pass-through rate).
- But Rush Limbaugh is correct on one thing about the framework–that the elimination of a state and local tax deduction will be especially harmful to Americans who live in so-called “blue” states like California and New York. Limbaugh thinks that is fine–“this is going to starve state governments” and he thinks “blue states getting “stuck like pigs” is just fine. That’s neither patriotic, or fair, or decent. But it is typical right-wing talk radio anti-government talk.
- By the way, federal taxes paid by “blue” state taxpayers already go disproportionately to needs of “red” state dwellers whose states don’t take care of them. There’s a clear message there. Higher taxed states at the state level create better standards of living for their citizenry and better growth that enables their citizenry to sustain higher levels of state taxation and allows them to pay a larger share of federal taxes. Those federal taxes are then used to make up for what’s missing in the red states because of their anti-tax, anti-government trends.
- Tax Foundation, another right-wing think tank, similarly supports the kinds of changes that the framework proposals, claiming that there are “big changes” for those in the bottom of the tax bracket and downplaying the huge changes for those in the top of the tax bracket that underlie most of the provisions. See “How the Trump Tax Plan will make ‘most people better off’, Tax Foundation president says“, CNBC, Oct. 1, 2017.
- Remember that the Tax Foundation has argued continuously over the years that the poor don’t pay enough taxes, arguing that even those who earn insufficient to sustain themselves decently should have more ‘skin in the tax game’.
- And the Tax Foundation has created a gimmick called “tax freedom day” where they average the taxes paid by someone like Bill Gates with the taxes paid by a poor guy making $25,000 a year to declare the day “average Americans” have paid off their tax bill. That is a ridiculous concept, since that average is absolutely meaningless. (If Bill Gates walks into a bar where there are 100 Americans all earning the same salary of around $50,000, the average income shoots up hugely, but it doesn’t mean that anybody in that bar other than Bill Gates is earning a tremendously high income.) But the Tax Foundation (and other right-wing groups) have used the “tax freedom day” concept to push the concept that the U.S. government collects too much in taxes, even though we collect much less as a percent of GDP now than in earlier days, and even though the rich already pay much less, on their income than they did before the Bush tax cuts.
- The Tax Foundation pretends to be non-partisan, but doesn’t see a tax cut or a dynamic scoring opportunity that justifies a tax cut that it doesn’t like. So naturally Tax Foundation president says the “tax framework” is a “step in the right direction” for “simplifying the tax system” and “creating a more dynamic tax system, one that is more conducive to economic growth.” Again, there is no empirical evidence supporting the idea that cutting these taxes for the rich–the estate tax, the AMT, the net investment income tax, the pass-through income rate, the corporate tax rate–will spur growth. It is most likely to spur more money to managers of businesses and shareholders, and that money is more likely to be used for wealth consumption (another home in Europe, for example) than for investment in business expansion (that might spur economic growth) or better worker pay (that could actually spur economic growth by increasing demand). The Tax Foundation claims taht doubling the standard deduction will create a lager “zero bracket”, but the standard deduction coupled with the personal exemption has always created a large zero bracket, and the new standard deduction, without personal exemptions, may in fact create a SMALLER zero bracket than the one that currently exists. Of course, Tax Foundation President Hodges does not acknowledge at all the way that the framework provides most of the tax cuts to the very rich, and only minimal cuts (and quite possibly, significant increases in taxes) for the non-wealthy.
Let’s remember also that government creates a stable commercial environment in which commercial enterprises can operate, and it provides critical infrastructure that assists those commercial enterprises as well as critical funding for basic research that corporations don’t tend to do on their own–basic research that often leads to commercially important innovations at the heart of multinational enterprises. Commercial enterprises benefit from contractual certainty, a clear process for formulation of regulations across different agencies, a stable and understandable system of courts and rules governing challenges brought to courts, publicly sponsored research, and publicly maintained infrastructure, including roads and highways and airports–all of which is essential to business operations. Businesses, that is, also have a patriotic duty to pay taxes and be responsible corporate citizens.
The right-wing think tank Institute for Policy Innovation doesn’t think so (unsurprisingly). The latest release from Tom Giovanetti, President of IPI, claims that “Patriotism for Business is Investing, Not Paying Taxes” TaxBytes 14.20 (Oct. 10, 2017). Let’s parse what Giovanetti says.
- first, he claims that U.S. companies had to “protect themselves from paying exorbitant taxes during the Obama years.” That’s garbage. Corporate tax rates did not increase under Obama. In fact, 75% of profitable corporations paid no taxes whatsoever in many of the Obama years, and even companies that paid taxes did not pay an effective tax rate anywhere close to the statutory tax rate of 35%. The current tax code has numerous shelters built in for businesses, including tax-free restructuring that allows them to transfer active businesses abroad. Profitable multinationals have been able to create financial and insurance businesses abroad that allow them to shelter much of their earnings, under the “active financing” exception to the Subpart F provisions. Companies have intentionally moved their assets to take advantage of that shelter (which should have been eliminated, if we are interested in fairness). Companies of course went even further to create “stateless income” (Ed Kleinbard’s term) that wasn’t taxed by any state, taking advantage of outdated transfer pricing concepts about comparative pricing that simply don’t work well for intangible intellectual property rights that are the core of a companies global enterprise.
- Second, he claims that “U.S. companies left overseas profits stranded in foreign subsidiaries, where they had already been taxed but would have been subject to even more taxation in the U.S.”. Mostly more garbage. profits aren’t “stranded”: much of that money is in U.S. banks, just not invested in those corporation’s U.S. businesses because they don’t want to expand in the U.S. The world-wide taxation system doesn’t overtax those companies: they get a credit on their foreign taxes and only pay more if they have moved their profits to a really low-tax jurisdiction. The U.S. tax, in other words, just catches those companies up, after the tax credit for foreign taxes, to the same amount their U.S. based competitors pay on similar income. Yes, companies continued to play transfer-pricing games–pretending to sell their key intellectual property, in a deal that changed nothing about the way their business was conducted and was permitted under the Code because the transfer pricing notions are based on old tangible property concepts. Yes companies continued to play inversion games. Both of these succeeded because Congress wouldn’t act to stop them.
- Third, he claims that President Obama’s concept of inversions as “lack of economic patriotism” is a claim that a US company should pay as much in taxes as possible. That is absurd, since most U.S. companies pay very little in federal income taxes–much too little in terms of the benefits that they receive from the U.S. legal and commercial system. No one says that companies should pay “as much taxes as possible” but progressive thinkers do suggest that U.S. multinationals should pay a higher percentage of their profits in taxes and that Congress should act to end these loopholes that allow U.S. multinationals to move key IP to low-tax jurisdictions to avoid U.S. taxes, when that IP was developed in the United States (often with funding from the government in the form of subsidies in terms of the R&E tax credit and support because of the NSF and NIH and other government grant programs that fund basic research at universities).
- Fourth, he claims that the only reason for an AMT for businesses is because of the “idea that the highest good for a businesses [sic] is to pay taxes.” This is a misunderstanding of the purpose of the AMT. The AMT for businesses exists for the same reason as it exists for individuals–as an alternative tax system to ensure that no one business is able to take advantage of so many of the (sometimes not well coordinated) loopholes and subsidies in the Code that they end up paying no taxes at all although they enjoy all the benefits of the U.S. legal and commercial system.
- Fifth, he says that “the most patriotic thing a business can do–is to invest, not to pay taxes.”
- It is true that investment by businesses is a way to expand and improve the business, and that is a good thing.
- What is not true is that corporate (and other business) taxes prevent businesses from investing and expanding. Taxes are a good thing because they support government programs that aid commercial enterprises as well as ordinary people and help drive economic growth. Investment is good because, if done well, it should lead to a better business model and should help drive economic growth.
- But note that if a business needs to make an investment–in new equipment, in hiring workers, in expanding places of business through new buildings and new technologies, most of those expenditures reduce the taxable income of the business and lead to lower taxes. So there is not this “either-or” between needed business investment and taxes that the Tax Foundation implies.
- When a business accumulates more money than it needs as working capital, what tends to happen is that the business pays its managers more and more and buys back shares, benefiting managers and substantial shareholders but not workers. One of the reasons for increasing inequality in the country today is that businesses have been short-changing their workers in order that managers and shareholders can reap more of the productivity gains. Managers who forty years ago got about 20 times the amount that average workers got now receive 200-400 times the amount average workers receive. Managers, needless to say, have not added that amount of increased productivity: they are taking the productivity gains that should go to workers (and some of the dollars that should go to taxes).
- Sixth, he suggests that the incredibly low corporate statutory rate (lower than our peer countries’ rates), elimination of the “no-taxes-safeguard” provided by the AMT, and immediately expensing (which runs counter to the actual economics of investment) will all “encourage investment”. But in fact it isn’t likely to encourage any more investment than businesses would do anyway. Corporations have been highly profitable under the Obama administration, and that profitability will be used for expansion if a business sees a potential for gains. The ‘savings’ from lowering business taxes are likely to go the same way that the low taxes on “repatriated” funds in 2004 went–to share buybacks and higher managerial salaries benefiting wealthy shareholders and managers, while the same businesses cut workers.
- Seventh, he suggests that a lower statutory rate will encourage companies to invest and perhaps relocate to the U.S. That’s an unlikely claim. What it will do is start yet another race to the bottom, as countries that have recently focused on tax evasion (European Union looking at Apple and Amazon and pushing Ireland and other countries to collect more in taxes) will once again be forced to consider lowering taxes to match the much lower rate that corporations would pay in the U.S. (A 20% statutory rate is considerably lower than the average OECD of around 24-25%, and will likely result in even lower effective tax rates, again, because Congress will not likely eliminate the many tax-subsidies built into the system with the current higher 35% rate.)
Giovanetti is wrong. Patriotism for U.S. businesses involves both wise investment to sustain and expand the business and payment of state and federal taxes to sustain and expand the protections for commercial enterprises funded by tax revenues, from physical infrastructure to legal systems to university research that often translates to creative innovations that allow businesses to move in new directions. The single-minded focus on tax cuts is mislaid. Socially responsible businesses lead to real economic growth, because they treat workers fairly, in terms of rewarding workers for productivity gains, and support the government programs that have made the U.S. a leader in business innovation since World War II.