Obama Shouldn’t Buy The Lower-Corporate-Taxes Line

Dave Johnson

There is a big push going on to again reduce tax rates for the giant multinational corporations. See if you can guess who will make up the difference? (Hint: it will be you paying through cuts, and smaller companies that are trying to challenge the incumbency of the giant multinationals.)

Recently in the post Beware the New Corporate Tax-Cut Scam: LIFT Is A Big LIE, I warned about the LIFT coalition of large corporations trying to get rid of taxes on profits made outside the country. Of course this would result in giant companies moving jobs, factories and profit centers out of the country.

The executives who run the giant multinationals want to be let off the hook for paying taxes on profits they make outside our borders. As an Apple executive said to The New York Times, giant multinationals “don’t have an obligation to solve America’s problems.” And to prove it, American corporations are holding $1.7 trillion in profits outside the country – just sitting there – rather than bringing that money home, paying the taxes due and then paying it out to shareholders or using it to “create jobs” with new factories, research facilities and equipment.

Laura Tyson Argues For Corporate Tax Cuts

LIFT is mostly about profits the giant multinationals make outside of the country. There is also the RATE coalition, another group of giant companies working to get corporate taxes cut here, too. To that end, Laura Tyson has a syndicated opinion piece out, Why Give Corporations A Tax Break? in which she argues a “pro-growth rationale” for giving the giant multinationals a tax break to make them “more competitive.”

After its 1986 tax overhaul, the United States had one of the lowest corporate tax rates among OECD countries. Since then, these countries have been slashing their rates in order to attract foreign direct investment and discourage their own companies from shifting operations and profits to low-tax foreign locations. In the most recent and audacious move, the British government has embarked on a three-year plan to reduce its corporate tax rate from 28% to 20% – one of the lowest in the OECD – by 2015.

The US now has the highest corporate tax rate of these countries. Even after incorporating various deductions, credits, and other tax-reducing provisions, the effective average and marginal corporate tax rates in the US – what corporations actually pay – are higher than the OECD average.

Cutting the rate to a more competitive level would encourage more domestic investment by US corporations, and would also make the US more attractive to foreign investors.

In the op-ed Tyson argues that we cut corporate taxes in 1986 to be “more competitive”, but since then other countries have been slashing their corporate tax rates, which makes our giant multinational corporations “less competitive,” so we should slash our corporate tax rates again to be “more competitive.”

Tyson’s argument, summed up:

  1. In the 1986 tax overhaul we cut corporate taxes a lot.
  2. But then other countries cut their corporate tax rates “in order to attract foreign direct investment and discourage their own companies from shifting operations and profits to low-tax foreign locations.”
  3. So we are now above the average.
  4. Therefore we need to cut corporate taxes even more to be more “competitive” and “attract investment.”
  5. Go to step 2 until corporate taxes worldwide are zero, then giant corporations start threatening to leave the country unless the country gives THEM money. (Tyson leaves out this obvious next step.)

Tyson understands that cutting corporate taxes (even more) means a loss of significant revenue for the country. She explains, “a rate cut would be costly in terms of foregone revenues: each percentage point would reduce corporate-tax revenues by about $100 billion over the next decade.” Since Tyson supports Obama’s call to cut corporate taxes from 35% to 28%, which means a loss of about $700 billion in tax revenue over the next decade. To make up the difference, Tyson argues for new revenue sources,

Similarly, a modest carbon tax or value-added tax, with credits or subsidies to offset the regressive effects on low-income households, could generate enough revenue both to pay for a significant reduction in the corporate tax rate and to make a meaningful contribution to deficit reduction.

But both of these new revenue sources — carbon tax and VAT — are good ideas and badly needed for policy reasons regardless of revenue raised. We should just do them. There is no need to reward large corporations with a tax cuts to get these. Also a Financial Transaction Tax!

“Revenue-Neutral” Means Someone Pays More. Guess Who?

Tyson says that since cutting corporate taxes would lose a lot of tax revenue we should cut these taxes in a “revenue neutral” way, meaning that we collect the same amount of tax revenue by “broadening” the tax base. In other words, cut back on deductions and loopholes. (Never mind that we ought to do away with loopholes anyway — they’re loopholes.)

Of course collecting the same amount of revenue from corporations would make them just as “less competitive” as when we started. The trick here of course is that corporations other than the giant multinationals that are “less competitive” now would have to make up that difference.

The giant multinationals pushing this new “tax reform” scheme understand that the process of cutting back on deductions and loopholes means their lobbying power will make sure the burden falls on their competitors — smaller companies, non-multinational companies, entrepreneurs and innovators. (In Lobbying and declining corporate tax burdens The Sunlight Foundation speculates on the relationship between continued corporate tax breaks and corporate lobbying.)

Corporate Taxes In Historical Perspective

The top corporate tax rate was 52.8% in 1970, 48% through that decade, then 46%, then the 1986 tax “reform” phased them down to 35%, which is where the top rate is currently.

When we cut corporate taxes, the revenue has to be made up somewhere and that “somewhere” is never at the top. A 2011 report by Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy ITEP) found that as a share of total tax revenue corporate taxes fell from 26.4 percent of total tax revenue in 1950 to just 7.4 percent of total tax revenue in 2010. Meanwhile personal income, Social Security and Medicare taxes increased from 51.4 percent to 83.8 percent of total tax revenue during the same time period.

According to the Center for Budget and Policy Priorities (CBPP), Corporate tax revenues as a share of GDP have fallen to near historic lows.

Corp tax rev as share of GDP

At 1.7% of GDP in 2009, the US has the third-lowest effective corporate burden in the world. according to the latest OECD analysis (for 2011 revenues), based on corporate taxes as percentage of GDP.

Meanwhile America’s corporations aren’t suffering too much from being “less competitive.” Corporate profits are the highest ever, as a share of GDP.

Finally, are these supposedly “high taxes” even being paid, thereby making the giant multinationals “less competitive?” The CTJ/ITEPstudy also found that 78 of 280 of the nation’s largest and most profitable companies paid no federal income taxes in at least one of three years.

Downward Spiral

Imagine states A and B. State B cuts their tax rates and passes laws that restrict unions, keep minimum wages low and other wage-lowering measures to “attract businesses” and their jobs from state A. As successful as state B might be at getting companies to move there, what is the effect on the larger economy of all of the states? Obviously the overall wages in the larger economy will fall as the same jobs move to a state with lower pay. And even the jobs that remain in state A are under pressure to reduce their wages, with the employers threatening to move their companies to state B as well.

And the government of state A has less revenue to fund their schools and courts and infrastructure, while the government of state B sacrificed revenue to make their state more attractive. So the overall level of investment in public goods also drops.

By reducing standards State B is undercutting the ability of the people in state A to control the companies in state A. State B has enabled companies to extort lower wages and other advantages elsewhere. State B is undercutting State A’s ability to be an effective democracy.

This is what is happening around the world as these giant companies put the squeeze on governments, with the threat to just go somewhere else. This is what happens when corporate power is allowed to reach such a level that it challenges the power of governments to control them. Originally the corporations We the People enabled in order to accomplish things that are good for US have changed into a force with enough wealth and power that instead of providing good jobs and goods and services, they instead demand we pay them tribute.

Laugher Curve

Tyson concludes her “pro-growth” op-ed with a big dose of taxes take money out of the economy, and cutting taxes will raise revenue logic, writing,

Of all taxes, corporate taxes are the most harmful to economic growth – without which meaningful deficit reduction is far more difficult to achieve.

Got that? She says taxes are harmful to growth, and corporate taxes make deficit reduction “far more difficult to achieve.” So she says we should cut corporate taxes to fight the deficit. (Pouring water out of a glass will magically fill the glass with water.)

Good Lord, is it April Fool’s Day or something?

Some Real Solutions

We should remember why We the People set up a system of laws that allows the formation of corporations. There are public benefits to enabling investors to pool funds to accomplish large-scale projects so we give them all kinds of advantages, not just limitations on personal liability. In return we (used to) ask for some things for us — like honest and ethical behavior, good-paying jobs, high-quality products and services, and a cut of the proceeds to fund our schools, infrastructure, and other things to make all of our lives better. And those schools and infrastrucutre etc., helped the businesses prosper… It was a beneficial cycle.

So here are some things that will help restore balance:

1) Tax the foreign earnings of these companies whether they “bring the money home” or not. Currently they are holding $1.7 trillion outside of the country, pretending this means they don’t owe the taxes on these profits. This cheats their shareholders either because the companies should be using that money to invest in new factories, equipment, R$&D, human capital, etc. thereby raising the value of the compay, or just distributing it to the shareholders!

2) Get rid of the loopholes that have been described. They are loopholes, and they should be closed. There is no reason to “balance” doing the right thing with a “reward” of a tax cut.

3) Bring the corporate tax rate back up to pre-Reagan rates, and start providing adequate funding to schools, universities, R&D, infrastructure, courts, antitrust efforts, etc. again. This will enable all of the parts of our economy that are not giant multinational corporations to be more competitive.

4) Bring the top tax rates back up to 91%, thereby discouraging the current quick-buck business models. Right now people can grab a fortune overnight and keep it. With a very high top tax rate people would have to build wealth slowly by building solid companies. And this requires the communities that surround these companies to have good schools, good infrastructure, etc.

5) Get rid of the capital gains tax break except for very long-term investments of certain kinds. The “incentive” to invest ought to be to make money on the investment. BUT keep a lower rate for long-term (5-10+ years) investment. This is an incentive for a long-term business model instead of get-rich-quick scams. People should build wealth slowly to encourage long-term business models. (See #4)


Research for this post was contributed by Richard Eskow.

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