This nytimes article describes how GE, despite being America’s largest corporation, does not owe any corporate income tax. The company’s shareholders, of course, pay income tax on dividends, and the company collects sales tax, pays payroll taxes, pays real estate tax, etc., but through cleverness, trickery, and, mostly, lobbying, GE escapes the 35 percent corporate income tax.
The author of the article explains to some extent how GE’s purchase of a Congressman (New York’s Charles Rangel) enabled them to get the tax breaks they wanted, but mostly the author interviews people who believe that the system can somehow be “reformed” so that GE will pay more in the future.
Given that our politicians are more or less openly for sale, I don’t see how a company with more than $100 billion in annual revenue can be denied the laws that it wants, particularly if those laws are obscure and hard for the general public to understand. Is it reasonable to believe that somehow the laws will be adjusted so that small companies, without the resources to purchase Representatives and Senators, or even attend $5,000 per person dinners, pay less while GE pays more?
Wouldn’t it make more sense to scrap the corporate income tax (which a lot of economists have never liked) and replace it with something less susceptible to lobbying by the largest companies?
Purchasing a congressman seems to have extremely high return on investment. But the tax laws are the only ones by which that return is achieved; here are some candidates:
– Regulation that [insert excuse here] with the side effect that it creates barriers to entry, to mobility, and to competition.
– Waivers for expensive laws and regulations that apply to others, granted for [insert excuse here].
– Sale of goods and services to government, with contract being awarded by [insert excuse here].
– Make it mandatory for the general public to buy a product for which you have a production advantage (a patent, economies of scale, etc), while outlawing or creating a mandatory phase-out of competitor products.
Just off the top of my head.
Yes, it might indeed make more sense to scrap the corporate income tax and replace it with something less loopholed. Corporate taxes are indeed passed on to consumers and investors anyway, so they might as well pay the taxes themselves in the form of personal income, capital gains, or dividend taxes.
Unfortunately the Republican Party has declared that no tax may ever be increased on any person or company for any reason even in the context of closing loopholes or a revenue-neutral reform, so there is no chance of this happening in the foreseeable future.
EZ: What’s your basis for saying that the Republican Party advocates maintaining a complex loophole-ridden tax code? The Congressman that GE purchased, Charles Rangel, is a Democrat. The one politician describe in the nytimes article as being successful in closing loopholes is Ronald Reagan. If memory serves, he was a Republican. The article says “the pendulum began to swing back in the late 1990s” (weren’t those the Clinton years?). Finally, the http://www.fiscalcommission.gov/ report proposes closing a lot of tax loopholes as part of lowering the rates and broadening the base. http://www.politicsdaily.com/2010/12/02/obama-deficit-commission-plan-wont-win-14-votes/ indicates that the plan was supported by quite a few of its Republican members.
If Republicans are to blame for all of our problems, including a tax code that benefits those with the most lawyers and lobbyists, how come we weren’t able to fix them all during the 2009-2011 Years of Glory in which Democrats controlled everything in Washington?
Repealing the 17th amendment would be a good start. Good luck with that.
I don’t believe I ever said streamlining the tax code was a high priority of the Democratic Party, not that it would have been easy to get past a GOP filibuster even last year. Clinton may have been President in the late 1990s and 2000s, but it was the Republican Congress at the height of the “K Street Project” era writing the laws that introduced so many loopholes back then. The modern GOP has little in common with Reagan (who raised taxes repeatedly, as well as simplifying them) on fiscal issues.
President Obama is now calling for a streamlining, and is meeting strong (but not monolithic) intransigence from the GOP:
See http://news.yahoo.com/s/ap/20110126/ap_on_re_us/us_state_of_union_taxes
and, for a reaction, http://www.tnr.com/blog/jonathan-chait/84930/norquist-vs-republican-apostates
Key quote:
“Norquist is a key enforcer of this dogma, in part through his Taxpayer Protection Pledge, which has the signatures of 237 members of the House plus 41 Senators. Chambliss, Coburn and Crapo all argue that they wouldn’t be violating the pledge if they signed a deal that lowers rates and closes loopholes while increasing revenue. The story is written in such a way as to give them the last word and leave the reader believing they’re correct. In fact, they’re not. The pledge explicitly rules out any promise to raise revenue through loophole-closing. Signatories promise to ‘oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.'”
EZ: That doesn’t seem like evidence for Republicans in general wanting to maintain loopholes. This particular group of Republicans apparently wants to reduce U.S. corporate tax rates to the international average while simultaneously eliminating loopholes. Because they don’t want to “feed the beast” any more money, they oppose doing one without the other.
The individual states should be a good laboratory to test your implied theory that the Republicans can be blamed for everything. There are states that have legislatures that have been controlled by Democrats for decades. New York, Massachusetts, and California are a few that I can think of. Is it the case that these states have fewer loopholes and a simpler tax system than two-party states? Is it the case that these states enjoy overall greater fiscal health? (I’m not sure of the answer because I haven’t tallied them all up, but I’m suspecting that these one-party states have similar structural problems to the two-party states). Certainly my own state of Massachusetts is virtually free of Republican power and yet the legislature has crafted a set of rules nearly as complex as the federal tax code, with ample carve-outs for cronies (e.g., interest from a Massachusetts-based bank is taxed at 5.3 percent (used to be 5) and from a bank, in, say, Texas, at 12 percent (used to be 10)).
>>>>What’s your basis for saying that the Republican Party advocates maintaining a complex loophole-ridden tax code? The Congressman that GE purchased, Charles Rangel, is a Democrat. The one politician describe in the nytimes article as being successful in closing loopholes is Ronald Reagan. If memory serves, he was a Republican.
The Republicans are the ones who constantly declare that closing loopholes is the same as a tax increase and liken revenue-neutral reform to a tax hike on the theory that once you have purchased a congressman and inserted a loophole, it the loophole becomes your private property. They will say, ‘the very concept of a loophole presumes it’s the government’s money in the first place, a loophole is just a place where you have the right to keep your own profits.’ That’s Republican code for defending criminal corruption in the tax code. You hear it a lot on Capitol Hill.
As for Reagan, he did a good job stealing the Mondale tax reform proposal. Congressman Rostenkowski (D-IL) was the one who actually pushed the so-called Regan/Reagan tax reform through congress. Rosty was a master of petty corruption and the greatest opponent of big money economy wrecking corruption in the last half century. A bipartisan movement put him into jail for playing the game backwards.
A very nice and short book about corruption and reform in the tax code in Showdown At Gucci Gulch. If you are interested in the subject, that book is the classic story.
Many politicans are guilty but Republicans are the current obstacle. Not one of them would work with the Democrats to reform in 2009-2011. If congress is 60% D and no Rs favor reform, you need over 83% of the D’s to pass anything and there aren’t that many non-corrupt congressmen in either party.
” Corporate taxes are indeed passed on to consumers and investors anyway,”
Having taken exactly TWO semesters of econ during my MBA, I can say that that indeed is what you are told at the beginning of one lecture, but by the end of the lecture, you learn that’s simplistic, and it depends on the elasticity of prices in the industry, such that many corporations really can and do pay taxes in ways that cannot be passed on to consumers. (Or so I recall, probably incorrectly).
However, I also wonder if corporate taxes should be done away with, NOT to reward GE, but to make it more fair to every business. I would do away with corporate taxes to make it easier for competitors to compete on a level playing field with GE.
(For similar reasons, I favor a universal health care plan, so that US companies can compete on the same playing field using the same cost structures as European companies.)
And I’m against communities giving tax breaks to companies as incentives for moving or staying in that community UNLESS the community also gets to place one or more people on the board of directors, or otherwise is able to control some amount of stock in the company. Which is to say, communities should just not give tax breaks to companies.
Jerry: http://www.nytimes.com/2008/06/01/business/01view.html quotes a Congressional Budget Office study in which it was concluded the “domestic labor bears slightly more than 70 percent of the burden [of the corporate tax]”. In Europe the conclusion was that “a $1 increase in the tax bill tends to reduce real wages at the median by 92 cents” (i.e., labor paid 92 percent of the tax).
There is really no magic to this. The residents of the United States have to pay for the government of the United States. If the government decides to grow itself or incurs enormous debt, pension, and health care liabilities, we will all (except for retired public employees), on average, have to pay more.
If it were easy to escape from reality, we could raise corporate taxes to 70 percent, eliminate loopholes, and then wouldn’t need income, sales, property, and excise taxes. All of government would be funded by GE and similar companies. The people of the U.S. would pay nothing and therefore we would all instantly be more than 50% wealthier.
[The only way that I can see to escape the “residents pay for government” trap would be to turn our military into a profit center, e.g., by pumping the oil out of Libya and Iraq and keeping the proceeds for ourselves. But our current collection of wars do not seem to be run on a cashflow-positive basis and therefore the cost of running government cannot be defrayed by resources captured in foreign countries.]
Phil: how do you feel about a tax holiday (lower tax rate) for corporations bringing overseas profits back into the US? Would it help us get more jobs? this article alleges that most of it would go to share buybacks but John Chambers said it could be invested in jobs in the US.
Jay C: I don’t see why a holiday on repatriated profits would yield job growth. The world is already awash in capital. If the Chinese, for example, thought it would be profitable to hire Americans in America, they could be doing it right now (the same way that U.S. companies are hiring Chinese people in China). The U.S. hasn’t done any of the things that I thought would be necessary to spur economic recovery (I set them out 2.5 years ago in http://philip.greenspun.com/politics/economic-recovery ), so I’m personally not surprised that we haven’t had private sector job growth in the U.S.
Interesting. Faced with a similar situation, India introduced a minimum alternate tax (called MAT) which is much lower but ensures that everyone pays.
If you asked the question “how can we devise a tax system that punishes small companies at the expense of big ones, rewards crony capitalism, and collects minimal, diminishing tax revenue?” you would get our current corporate tax system.
But both parties benefit from playing corporate favorites, so it’s not going to happen.
Not to mention the insanity of Republicans extending all the Bush tax cuts while caterwauling over the size of the federal deficit. They don’t want to fix the government, they want to sabotage it.
I thought of a situation in which the corporate profit tax could conceivably get us out of the “we have to pay for our own government” trap: if foreigners own the corporations. In a Third World country, with foreigners supplying most of the capital and therefore being significant owners of the local companies, it might make sense to impose hefty taxes on corporations since some of the burden will fall on the foreign owners. Of course, this will probably discourage any future investment but it is conceivably a way to confiscate some of the foreigners’ existing wealth that they unwisely left in the Third World country’s jurisdiction.
The idea of a corporate tax to begin with is absurd, and born of the irrational way people anthropomorphize institutions. People pay taxes, not legal abstractions. When you charge a corporate tax rate, it’s just another tax on people. The only difference is that it’s a tax whose burden is very difficult to compute, and is distributed among all the people interacting with that company (the employees and customers, namely, but also the shareholders). Nobody even know if this tax is progressive or regressive, as far as I know, though I’d be willing to bet its highly regressive in the case of companies that produce widely used products and/or which employ many blue collar workers.
Just off the top of my head, isn’t GM paying no taxes because (a) it’s made huge losses in the past and (b) it’s paying huge amounts of tax-deductible interest on its huge loans? Removing either or both of those tax “loopholes” would pretty much crater a lot of corporations, I would have thought.
I think the mistaken idea that taxing corporations reduces the tax burdens on individuals is an extension of the idea popularised by politicians that someone else can be made to pay for the benefits promised in return for votes. Voters love to believe that if the government pays for something, they’re getting it for free. But as you point out, they will have to pay for the government at some point.
The whole thing is closer to a pyramid scheme than most people are comfortable admitting. Instead of just letting people pay for things they need out of their own pockets to the providers they choose, we take money away from people by force and then pass it through a vast bureaucracy, so that by the time they get the services they paid for the linkage is broken in their minds and the services are seen as free. Whereas in fact they are ridiculously expensive because of having to pay for the huge bureaucracy, and the agency problem of having bureaucrats pay for things that they will not themselves use, with money that is not their own: there is no incentive for cost-effectiveness or indeed any effectiveness at all.
I think future generations will look at us and wonder how people could be made to act so stupidly.
Faced with a similar situation, India introduced a minimum alternate tax (called MAT) which is much lower but ensures that everyone pays.
We have an AMT here, too, on personal income taxes. But it still exempts municipal and state debts, which Congress might be forbidden from taxing anyway (“the power to tax is the power to destroy” and all that).
But this article is about corporate taxes. What counts as income? That’s a really fuzzy definition.
I wonder how our host would feel about a carbon tax. Anything can be gamed, but this would be much harder, since carbon is carbon. We would need to explicitly and consciously not allow any kind of offsets from reducing carbon through foreign activity. Search youtube for carbon tax offsets.
Dan: There are a lot of activities that could be discouraged through taxation, e.g., clogging the roads and highways, emitting pollution, uglifying the landscape through sprawl (which also increases traffic congestion), making political contributions (nearly all of which are made by groups seeking benefits from the government at the expense of the average citizen), etc. I would much rather see the government support itself via these kinds of taxes than a tax on a corporation doing what it is supposed to be doing, i.e., operating profitably.