tax rates

Corporate America must pay fair tax rate

Posted on by j.giglio

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

Eating soup with our hands

Posted on by j.giglio

With the usual drama and theatrics, Congress and the White House put together a last-minute New Year’s Day deal to avert pushing the economy into recession. As a result, we have temporarily overcome our cremnophobia – fear of cliffs.

But once again, our leaders averted immediate crisis without addressing any of the nation’s most pressing fiscal problems.

By way of background, during an absurd tangle over the nation’s debt ceiling in the summer of 2011, Congress and the White House agreed to get serious about reducing the deficit and accumulated debt. But when they couldn’t agree on how, they instead struck a deal.

Congress created a super committee that was given the job of developing a long-term budget solution. The deal stipulated that if the committee failed, a $600 billion mix of spending cuts and tax increases would automatically take effect on January 1, 2013. Half the spending cuts would come from the defense budget and half from domestic spending.

Nobody wanted the cuts, but that was the point. They were designed to be so intolerable that Congress would make a deal to avoid them.

Predictably, it didn’t work. The super committee failed and Congress and the White House did nothing until just before New Year’s, when they passed the American Taxpayer Relief Act of2012.

The law makes most of the Bush tax cuts permanent- at least for now. Current tax rates were extended for individuals with incomes up to $400,000; $450,000 for married couples.

Households above these thresholds will see their income, capital gains, dividend and estate tax rates increase slightly. The law also permanently fixes the Alternative Minimum Tax and extends an additional year of unemployment benefits to two million people.

It also postpones the first installment of automatic spending cuts for two months while Congress works on a fiscal plan and the country hits the current $16.4 trillion debt ceiling. Congress and the White House again star as Scarlet O’Hara- I’ll worry about it tomorrow.

After all the sound and fury, the headline number for increased revenue is about $600 billion over 10 years. But the Congressional Budget Office estimates that compared to going off the cliff, this deal will add about $4 trillion to the debt during that time.

The inconvenient truth is that the fiscal cliff minideal was another missed opportunity to remodel our fiscal house. It dodged all the important questions about entitlement reform, stabilizing debt as a share of the overall economy, and comprehensive tax reform that helps America’s long-term prospects by promoting growth and generating revenue.

But special interests benefited from the deal. Several tax breaks that were to lapse at the end of 2012 were extended.

Accelerated tax write-offs for NASCAR track owners will cost taxpayers about $70 million. Film and television producers get to expense the first $15 million of production costs incurred in America to encourage domestic TV and film production, at an estimated cost of about $430 million.

Tax perks for algae growers total $59 million, consumers get $7 million in breaks for buying electric motorcycles and manufacturers of energy-efficient appliances retain perks worth about $650 million.

Meanwhile, the expiration of the temporary 2 percent payroll tax cut means the average American worker will pay another $1,200. So much for good old-fashioned middle class tax relief.

As Democratic Sen. Joe Manchin of West Virginia noted, “Something has gone terribly wrong when the biggest threat to our American economy is the American Congress.”

Now it remains to be seen whether the recent fiscal follies are a coming attraction for the next crisis, when Congress must again raise the $16.4 trillion debt ceiling in March.

Is this any way to run a country? To paraphrase 19th century writer Sydney Smith, if Americans had made the same progress in the culinary arts as they have in governing themselves, they would still be eating soup with their hands.

originally published: January 12, 2013