There are so many problems with our corporate tax code right now. Just like in the individual tax code; it’s structured to benefit those with the most influence i.e. those who’ve donated the most to the political process. In business – it’s all about the bottom line and a focus on return on investment. One could hardly argue that the best return on investment is donations i.e. bribes to politicians. Remember – every $$$ that a corporation doesn’t pay…is a $$$ that Americans have to find out of their own paychecks in order to pay for infrastructure, education, healthcare, etc. And while some might argue that a person pays that anyway just through the business’s increased costs, facts do not bear that claim out.
Only suckers pay the rate because there are lots and lots and lots and lots of available deductions. This in turn creates two problems. One is that if you’re in a line of business that isn’t well established and hasn’t already created lots of loopholes for itself, you’re now paying a much higher tax rate than other kinds of firms.
This discourages capital from flowing into entrepreneurial activities. The second is that it gives firms a very large incentive to focus time and resources on tax avoidance. A great productivity-enhancing innovation might boost profits by 3 percent, but that may be peanuts compared to the return on lobbying for a new loophole that shelters your existing profits from taxation.
As part of the negotiating and horse-trading that is Congress…the tax code grows ever more complicated, but also – corporations work very hard to game the system to the very best of their ability. In fact – one of the current Republican presidential candidates – Mitt Romney – was Chairman of the audit committee for 6 of his 11 years on the Marriott International Board of Directors.
During Romney’s tenure as a Marriott director, the company repeatedly utilized complex tax-avoidance maneuvers, prompting at least two tangles with the Internal Revenue Service, records show. In 1994, while he headed the audit committee, Marriott used a tax shelter known to attorneys by its nickname: “Son of BOSS.”
Employing another strategy, Marriott legally avoided hundreds of millions of dollars in income taxes thanks to a federal tax-credit program criticized and allowed to expire by Congress. Marriott has also shifted profits to a Luxembourg shell company. During Romney’s years on the board, Marriott’s effective tax rate dipped as low as 6.8 percent, compared with the federal corporate statutory rate of 35 percent.
But while corporations game the system…make no mistake – it goes directly to the bottom line which means that a disproportionate amount goes to wealthy investors. The following graph, composed from data compiled by the St. Louis Fed, shows how for the past 30 years, corporate profits have exploded while our net export of goods and services overseas have plummeted.
Source: Think Progress
Of course – as revenues from corporations and other personal consumption taxes decrease – this has had the largest impact on our country’s long term fiscal deficit:
But the main reason that the debt spirals up and out of control in that alternative scenario while not doing so in the baseline scenario is revenue. In fact, fully three-quarters of the difference between the debt in the baseline and the debt in the alternative is the result of much lower revenue in the alternative.
Source: Center for American Progress
Paul Krugman points out that these corporate profits do not lead to an equal share of investment in the U.S.
…businesses are by and large taking in more in profits than they want to invest in expanding their businesses, so they’re lending out the excess, parking it in various securities. There’s absolutely no reason to believe that taxing their corporate jets would reduce investment, or that giving them a tax holiday on repatriated funds would increase investment.
A great example of this gaming of the system is the oil industry…
Just five oil companies (Exxon, Shell, Chevron, BP, and ConocoPhillips) “are sitting on cash resources of $59 billion.” This pile of cash “is 30 times more than the estimated $2 billion in annual tax breaks that these companies receive.
Source: Think Progress
There is an uneven playing field with corporations. All 12 of these companies received tax REFUNDS for the combined LAST THREE YEARS:
In at least one of the three years, 78 firms paid no or negative tax rates, and legally-by writing off capital investments before they actually wear out (known as “accelerated depreciation”), making use of tax deductible stock options and industry-specific tax breaks, and offshore tax havens.
Source: The Economist
One more excellent example of just how unequal the tax code is by industry.
But the basic takeaway is that there are plenty of industries that are benefiting from the current corporate tax code, and are likely to fight like hell to preserve the breaks they’re currently getting. Moreover, as Appelbaum notes, a lot of these industries are the sympathetic ones: “High-tech industries pay relatively little in taxes. Utilities and other infrastructure providers pay some of the highest rates.
Source: Ezra Klein
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