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.
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.
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.