Both President Obama and Republicans have called for lowering the corporate tax rate, citing America’s global competitiveness. But cuts should be reserved for companies that invest in the U.S. and its workers. Other corporations should pay more, and all should pay their fair share.
The federal government first taxed corporate income in 1909. Corporate rates were initially below 10 percent, but following World War II they increased dramatically, to over 50 percent in I951. Between 1951 and 1986, the top corporate tax rate ranged from 46 to 52.8 percent.
Large corporations were also complaining about the tax rate in 1986, the year of the last significant federal tax reform. The rate was reduced to 35 percent, loopholes were closed and the tax code simplified. At the time, the rate was lower than that of most developed countries. But today the 35 percent rate is one of the world’s highest, and it jumps to 39.2 percent when state and local taxes are included.
This rate is double the European average and more than triple Ireland’s 12.5 percent rate. Over the past 25 years, almost every country in the Organization for Economic Cooperation and Development has cut its top corporate tax rate. Corporate America is again arguing that the U.S. rate is a disadvantage for domestic corporations.
But while U.S. companies often complain about the 35 percent top rate, they don’t like to admit that hardly any of them pay anything close to it. While the United States’ corporate tax rate is relatively high, it’s not a meaningful measure of the actual corporate tax burden.
A 2013 Government Accountability Office report showed that large, profitable U.S. corporations paid an effective federal tax rate of 12.6 percent of their worldwide income in 2010, about one-third the statutory rate. Adding in foreign, state, and local taxes increased the average effective tax rate to 16.9 percent, which is certainly competitive with other developed countries and is a lower rate than the average teacher or police officer pays. A 2012 study by Citizens for Tax Justice found that over a recent period, 30 of the largest U.S. multinationals with more than $160 billion in profits paid no federal income tax at all.
According to the Congressional Research Service, corporate income taxes have diminished as a source of federal revenue, from 39.8 percent in 1943 to 9.9 percent in 2012, as corporate profits reached record highs. The GAO reported that in 20I2, corporate income taxes generated about $242 billion in federal revenue, while individual income taxes accounted for $1.I trillion.
U.S. corporate tax collection equaled just 2 percent of gross national product in 2011, according to the OECD. That was the lowest in a ranking of 27 wealthy countries.
The reason they pay less in taxes is not because corporations play a less important role in our economy or that corporate profitability has diminished. Rather, it is that corporations have learned how to exploit loopholes in the tax code and retain lobbyists who move well in Washington. And let’s not forget the $2 trillion in profits stashed abroad.
Much of the simplification from the comprehensive 1986 tax overhaul has been lost. Between 2001 and 2010 there were over 4,000 changes festooned to the tax code, resulting in a code of nearly four million words with a sky-high impenetrability quotient.
Nearly six years after the financial meltdown, the economy is still far from recovery. Over 20 million Americans who want a full-time job can’t get one and labor force participation is at its lowest level since 1978. Low wages and stagnant incomes prevail.
Congress should create incentives for companies that invest and create jobs in the U.S. and impose higher taxes on firms that do not. But any tax reform should start from the premise that corporate America has to pay its fair share, and that means no profitable corporation having a lower tax rate than your child’s teacher.
originally published: August 30, 2014
