Tag Archives: rates

That Terrible Corporate Tax Burden

One of the reasons I became a faithful reader of Ed Brayton’s Dispatches from the Culture Wars is that he disdains the euphemisms that “polite” commentators use to convey their criticisms, and simply tells it like it is. A good example is a recent post about the “confusion”–or deliberate obfuscation–surrounding discussions of corporate tax rates.

As he began,

Republicans love to claim that America’s corporate taxes are the highest in the developed world. This is a lie. The marginal tax rates, up to 35%, are among the highest. The actual rates paid are a fraction of that. In fact, some of the most profitable companies in the world pay no federal taxes at all.

The Institute on Taxation and Economic Policy used the tax information filed by  258 profitable Fortune 500 companies to analyze what those corporations actually paid. The companies chosen for the analysis collectively earned more than $3.8 trillion in profits over the eight-year period of the analysis.

Although the top corporate rate is 35 percent, the study found that 100 of the companies  — nearly 40 percent — paid zero taxes in at least one year between 2008 and 2015.

Eighteen, including General Electric, International Paper, Priceline.com and PG&E, incurred a total federal income tax bill of less than zero over the entire eight-year period — meaning they received rebates.

This result was entirely legal. The companies simply took advantage of numerous loopholes in the tax code. Some, including American Electric Power, Con Ed and Comcast, qualified for accelerated depreciation. That allowed them to write off most of the costs of  new equipment and machinery well before it wore out–or in “tax speak,” well before before the end of its “useful life.”

Facebook, Aetna and Exxon Mobil, among others, saved billions in taxes by giving options to top executives to buy stock in the future at a discount. The companies then get to deduct their huge payouts as a loss. Facebook used excess tax benefits from stock options to reduce its federal and state taxes by $5.78 billion from 2010 to 2015, the institute found.

As Ed reminds us, “In the 1950s, corporate taxes were about one-third of all federal revenue; today, it’s under 10%. And the burden is then transferred to individual taxpayers.”

Conservative economists will remind us that ultimately, individual consumers will pay corporate taxes–that the taxes companies pay will be factored into the prices of the goods they sell. And that is absolutely true. But it is a far fairer and much more honest way to do business.

The prices of consumer goods should reflect the actual cost of producing them, and taxes are–or should be– part of that cost. We don’t want the manufacturer who is “disposing” of his waste illegally to be able to undercut the prices of the guy who is following the rules, and we don’t want companies with more “creative” tax avoidance strategies to undercut competitors who are paying their fair share . Capitalist markets only work properly when pricing is honest.

Our current system doesn’t reward innovation; it rewards “game playing.” Lobbyists sneak arcane loopholes into our increasingly complicated tax code. Those loopholes further tilt the playing field, distorting market forces in ways that favor the companies that  can afford the lobbyists.

I’m all in favor of lowering the top marginal corporate tax rate, if we get rid of the loopholes at the same time. (We should start with those that provide an incentive for moving American businesses to off-shore tax havens–but we shouldn’t stop there.)

The current system allows corporations to whine about the tax rate in public, while making out like bandits behind the scenes. It’s dishonest, it’s anti-competitive, and it shifts the tax burden in ways that are unfair to individual taxpayers and a drag on the economy.

A responsible Congress would eliminate or dramatically reduce the loopholes and readjust the tax burden. Our Congress, however, is too busy making the system worse.

Are We Really Talking About Taxes?

I’m beginning to suspect that all the anger/righteous indignation/resentment directed at the subject of taxes isn’t really about taxes at all.

If Americans were really discussing the tax system, surely they would know more about it. And I’m not just referring to the ludicrous arguments being made by the televised talking heads in the wake of the healthcare decision. (Hint: the Supreme Court ruled that the imposition of a penalty for noncompliance was an appropriate exercise of Congress’s taxing power–they didn’t rule that the penalty was a tax.) I’m talking about far more basic information.

A recent poll of Tea Party folks found that 90% of them believed taxes had either gone up or remained flat under Obama; only 2% answered (correctly) that taxes had gone down, which they have for 95% of American taxpayers. Bill Maher noted the irony: members of an organization formed to oppose taxes and named after a historical group known for its anti-tax activism don’t know whether taxes have gone up or down.

Nor is this an anomaly. Discussion of taxes rarely include definition of the term. So people will assert, with a straight face, that “the bottom half” of Americans “don’t pay taxes.” This is hogwash–they pay lots of taxes. Poor people may not make enough money to owe federal income taxes, but they pay federal payroll taxes, gas taxes, sales taxes, utility taxes, property taxes (even renters pay property taxes, which are part of the rent)…In fact, the percentage of their income that the poor pay in state and local taxes is far higher than the percentage paid by the wealthy.

So–we have people who don’t know whether taxes have increased or decreased, and pundits whose calculations of the tax burden conveniently or mistakenly leave numerous taxes out of the equation. But my biggest pet peeve is the folks who discuss tax rates without distinguishing between the marginal rate and the effective rate.

Right now, we are arguing about the wisdom of returning to the marginal rates under Clinton–approximately 39%. Listen to the bloviators on your favorite talk show and you are likely to get the impression that such a rate translates to taking 39% of the taxpayer’s income in taxes. Of course, it means no such thing. It means that once an individual has made enough to be in the highest income bracket, each dollar in that bracket will be taxed at that rate. The effective rate is the actual percentage of overall income paid, after averaging out the rates applied to each income bracket. That–plus lots of loopholes aka “incentives”–is why Mitt Romney’s effective rate was in the neighborhood of 13%, and why corporations that are theoretically subject to 30%+ tax rates actually paid 12.6% in 2008.

My point here is not to advocate for any particular tax policy–we can all agree or disagree about what an optimum tax system would look like. My concern is more basic. It seems to me that if we were really arguing about taxes, we would know much more about them. And if we aren’t really arguing about taxes–if taxes are just a useful surrogate for whatever it is that actually has our collective panties in a bunch–what is that sore spot?

What’s the real source of our sour national disposition?