There seems to be bipartisan agreement about one budgetary matter these days. Republicans and Democrats agree that we have to lower corporate tax rates to be more competitive, and that to offset any revenue losses to the Treasury from doing so, we have to close business tax loopholes.
The bipartisanship on this issue got me wondering. Are legislators in both parties just sucking up to corporate givers for campaign contributions? Or are they simply utterly ignorant of the Tax Code they seem determined to change? Being more forgiving of ignorance than pandering, I’ll give these legislators the benefit of the doubt and assume they jut don’t understand what they’re about to do.
To twig what’s really going on here, let’s look first at that badly misused term, “tax loophole.” What it means, what it really refers to, is a mistake in writing a tax law. A comma is put in the wrong place. A word that should have been capitalized isn’t. A term is used that could have more than one meaning. Some sharp tax attorney (and there are lots of them on these shores) spots this error and uses it for a brief period to reduce a company’s tax obligation.
This is always a short term tax reducer because tax writers in Washington are always finding these loopholes and closing them. Indeed, the game of opening new ones and closing old ones is an ongoing source of amusement among both government tax writers and private tax attorneys.
Saying that cutting the top corporate tax rate from 35 percent, as Republicans want, or the 29-31 percent rate Democrats are proposing, will actually be made up in revenue terms by “closing tax loopholes” is thus patently absurd. What would have to be cut or done away with altogether to achieve revenue neutrality would not involve “tax loopholes” but “tax preferences.”
Such preferences are not mistakes. They are deliberately written into the Tax Code to foster corporate behavior that’s deemed economically worthwhile. Sure, a few of these preferences are company-specific and slimed into a tax bill by lobbyists for just a single firm, and these are eminently dispensable. But trashing them would save relatively little, certainly not enough to offset the revenues lost by reducing corporate rates from 35 to 25 percent. To do that, you would have to rid the code of preferences such as credits for R&D and energy conservation, and accelerated depreciation for new equipment.
Would American companies really be more competitive, would they create more jobs domestically, if they paid lower taxes but had less incentive to invest in R&D and energy conservation, and less incentive to purchase new equipment earlier? Of course not. What these lower rates would promote instead is higher salaries for CEOs, and an even smaller share of of the country’s total taxes paid by corporations — a share whose size has dropped dramatically in recent decades.
The idea that large American corporations are in fact overtaxed compared to companies in other countries is itself nonsensical. People making this argument always point to our official corporate tax rate, 35 percent. But big companies no more end up paying this than the self-employed end up paying their own income taxes on their gross income. Individuals pay on their net incomes, and corporations on their net profits. This is their actual rate.
GE has been cited often of late for paying no federal taxes (or 7.4 percent if you figure these taxes a different way). About 20 percent, however, is now the norm for many of our largest companies, which doesn’t put this rate much out of line with our international competitors.
And taxes, it must be emphasized, aren’t the main reason so many American companies have relocated abroad over the years anyway. Other factors, lower wages being the primary one, are the main reasons.
So here’s the game. Here’s what you need to know. Here’s what to look for in any budget or tax talk that comes out of Washington. If the two major parties agree on something, it’s because that something benefits the rich, Wall Street and corporate executives. All the rest is pixie dust.
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