Tag Archives: loopholes

“Tax” Is Not A Four-Letter Word

As Congress takes up consideration of what the President and GOP have labeled “tax reform,” and what impartial observers describe as tax cuts mostly for the wealthy, it’s time for a re-run of my rant on the subject of taxation.

I’ve been particularly incensed by the appearance in Indiana of a TV spot aimed at Senator Joe Donnelly. Donnelly is a Democrat (moderate, of the Hoosier variety) considered vulnerable in 2018. The spot features a lovely young woman talking about the importance of tax reform–no specifics, no definitions, just a plea to Donnelly to support “fair” taxation.

I’m all for fair taxation, and I’m willing to bet everyone reading this is, too. I’m also willing to bet that definitions of a “fair” tax system vary widely (the devil, as we all know, being in the details). The one thing we should all recognize, however–whatever our personal opinions about “fairness”–is the difference between tax reform and tax cuts. 

As Jared Bernstein recently wrote in an article in the American Prospect,

In D.C. tax-debate parlance, “tax reform” means something specific: cutting tax rates and broadening the tax base. Rate reductions lose revenue, but you make it up by closing loopholes, exemptions, and favorable treatments of one type of income over another, thus broadening the income upon which taxes are levied.

As Bernstein points out (and we all know), most loopholes are the result of lobbying by special interests, not some disinterested analysis of their utility, making them very hard to eliminate. Even more pernicious is the belief–an article of faith in the GOP–that lower rates will generate more economic activity and thus more tax revenue. There is absolutely no evidence supporting this theory, and considerable evidence rebutting it, but it refuses to die.

In the current tax debate—no surprise—the Trump administration and the Republican Congress are predicting that their tax cuts will return large growth effects. They claim their plan—and to be clear, there is, as of yet, no plan—will increase the real GDP growth rate by at least half, from around 2 percent to 3 percent or 4 percent, and that this increase will offset much of the costs of the cuts.

This was the same story told by Reagan, Bush I, and Bush II, and in every case the results belied the claims. The most recent example, from the state of Kansas, is particularly germane to this discussion, because it reveals flaws in the same ideas being bandied about by the current Congress.

Tax policy experts estimate that the measures being discussed would cost government $6.5 trillion in revenues over ten years, and dramatically increase the deficit the GOP pretends to care about.

The vast majority of the benefits of these measures accrue to the wealthiest households: Almost 50 percent of the cuts go to the top 1 percent, while 6 percent go to the middle fifth. About 27 percent of the gains go to the 120,000 families in the top tenth of the top 1 percent, whose average pretax income is $11 million.

If anything remotely like this package passes, it will exacerbate levels of inequality that already exceed those of the Gilded Age.

According to the Brookings Institute,

this tax reform plan gives a lift to growing inequality, and signals that the GOP is okay with persistent poverty and with the inability of one-third of us to feed our kids. It’s time to ask ourselves, how do we craft tax reform for the long term—reform that tackles American poverty and inequality and creates the conditions for inclusive economic growth?

I would suggest that genuine tax reform begins with the recognition that “tax” is not a four-letter word. Taxes are the dues we pay for social peace and stability, for the myriad of services that modern societies require and their citizens demand, and from which we all benefit.

We currently have a system that incentivizes the “haves” to evade their responsibility to pay a fair share, or even to discuss what a fair share would look like. Until we have that conversation, we may see tax cuts–mostly for the already privileged– but we won’t see anything resembling genuine tax reform.

 

 

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.