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UnCommon Sense about Corporate Taxes

Edited_flickr_chuckthewriter

Recent reports of GE’s artful dodge of U.S. income tax liability are the perfect curtain raisers for the annual tax filing ritual. Yet another example of the injustice of our tax code! Time for a flat tax! No more loopholes for fat cats! Put aside GE’s tax lawyers’ interpretation of the tax code. What is more important than the furor over the story is that it represents yet another missed opportunity for a rational debate and another lost chance to design tax policies to spur innovation, global competitiveness and growth.

When it comes to tax policy, the left usually lumps the rich and corporations together as villains who should pay up. They argue the tax code is not progressive enough and one way to make it so is to go after the plutocratic moneyed interests.

Inadvertently, the left makes a legitimate point lumping wealthy individuals and corporations together. But it is not because corporations and wealthy individuals are two distinct entities with common traits. Rather it is because a corporation is individual people – some rich, some poor. A corporation is a legal construct but it actually an amalgamation of employees and shareholders bonded by a desire to take in more than what is spent producing whatever it provides to the market. When corporations benefit from tax cuts, guess who benefits. It is not a data file sitting in some computer in Delaware but investors, employees and consumers.

As for progressivity, the left also makes a fair point as we have seen income disparity widen in the last 30 years. But we aren’t going to close income gaps by going after corporations. Rather we need to abolish the tax cuts on individual dividend payments instituted almost a decade and raise the top marginal rates on individual income to mid-1990s levels. But don’t shake down corporations. In today’s globalized, highly-competitive market, we can ill afford to raise money from companies facing competitors whose countries are cutting, not raising, corporate taxes. The U.S. now has one of the highest effective corporate tax rates of any OECD company. In other words, not only is the rate U.S. corporations pay (on average 39 percent) high, but the actual rate they pay after deductions and credit is also extremely high, notwithstanding some individual companies who may not pay much in any particular year. The high corporate tax rate is not making our companies stronger and inducing domestic investment. Quite the opposite.

Meanwhile, many of those on the right and in the center have an almost messianic devotion to the notion of broadening the tax base and lowering rates by getting rid of a host of deductions, credits and exemptions. For them, simplicity is the golden rule. They want to tax every company and every activity the same way.  But as philosopher Alfred North Whitehead stated, “seek simplicity but distrust it.” There’s a simple reason not to treat everything companies do the same: the impacts on jobs and growth are not the same. That’s why, for example, virtually every academic study on the issue finds that giving companies a tax credit for research and development they do here in the United States is good effective policy. It’s the same for tax credits for investment in new capital equipment and software. There’s also a good reason not to treat all industries the same.

The simple fact is that industries like grocery stores, electric utilities and car dealers do not compete globally while industries like steel, pharmaceuticals and electronics do. While the former provide needed services if we raise their taxes they are not going to build fewer grocery stores, electric wires, or car dealerships.  But if we raise the taxes of steel companies, drug companies and electronics companies they will do the rational thing that any company would do: move production to the nations that tax them less. Currently, the former industries pay significantly higher effective tax rates than the last three. And that is exactly how it should be. This is why many state’s tax code favors manufacturing and high tech firms. It’s why most countries’ tax code does the same thing.  They realize that jobs depend on the health of their companies that are in competition with firms outside their borders.

So, as you get ready to file your taxes, don’t grumble about GE. Turn your anger toward a polarized, irrational and tired debate in Washington that is aimed at leveraging votes instead of creating the kind of innovative, productive and globally competitive economic activity that American workers so desperately need.

Photo credit: chuckthewriter

 

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About the author

Robert D. Atkinson is the founder and president of ITIF. Atkinson’s books include Innovation Economics: The Race for Global Advantage (Yale, 2012), Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics is the Answer (Rowman & Littlefield, 2006), and The Past And Future Of America’s Economy: Long Waves Of Innovation That Power Cycles Of Growth (Edward Elgar, 2005). Atkinson holds a Ph.D. in city and regional planning from the University of North Carolina, Chapel Hill, and a master’s degree in urban and regional planning from the University of Oregon.
  • loudounvoice Twitmyer

    Lost Budget Revenues or unfair Corporate Tax Rates?There lots of reasons to ‘go after’ the tax code. There are also many ways to incentivize our corporations; ways that will keep our citizens employed here at home and still enable our US based corporations to compete in the global economy. The real question is what kind of a country do we want to live in? Do we as a country provide a secure safety net for all our citizens, including the best education and medical care we can provide and a country that shares that obligation fairly? That kind of country is not riff with class warfare. We can have a fair tax system and not revert to Dickinsonian England.Corporations complain that the current tax rate is a global competitive disadvantage. Much of that purported disadvantage is directly linked to the way we provide health care. Is the national business community ready to move away from our fee for service, based insurance care? The new health care bill at least began that discussion, but many of the provisions that began thay move were cut. Our country is alone in linking health insurance to employment. Moving away from employer provided fee for service medical insurance would go a long way toward leveling the international playing field. The second complaint from corporations and their political base: our corporate tax rate is not globally competitive. That complaint is pretty hard to evaluate while our tax code is so skewed by corporate welfare and displaced costs. Who actually pays for the community based costs of producing a product, the externalities? That fight is inevitable in a capitalist system, but the process for incorporating external costs into the price of goods needs fixing. Without it the system itself does not work. No one can make real economic choices without a price that actually reflects true costs. All of them. The most egregious results of that broken cost system can be seen in the energy field. The G20 says that the US is one of the worst offenders. Coal is a case in point. The environmental costs of mining and of producing electricity have not been included in the cost of coal energy. 70% of our coal plants and all of our nuclear facilities are more than 30 years old. 50 GWs of our small power plants are over 40 years old and have no environmental controls; if we broaden the conversation to plants lacking scrubbers, the plants producing large amounts of pollutants grow to 69 GW, or 20% of the total US coal fleet. The rest of the fleet will still require large additional investment. What does this environmental cost-shifting mean? The unpaid health costs of a typical coal plant have recently been quantified recently by a Harvard physician. They are substantial.Here is a summary of the annual toxic output of ONE typical coal plant: 10,000 tons of sulfur dioxide (SO2), which forms small airborne particles that can penetrate deep into lungs;10,200 tons of nitrogen oxide (NOx), as much as would be emitted by half a million late-model cars; 720 tons of carbon monoxide (CO);220 tons of hydrocarbons, volatile organic compounds (VOC), which form ozone;170 pounds of mercury, where just 1/70th of a teaspoon deposited on a 25-acre lake can make the fish unsafe to eat. 40% of our tainted seafood is the results of coal burning;225 pounds of arsenic; 114 pounds of lead, 4 pounds of cadmium, other toxic heavy metals, and trace amounts of uranium.How is it that we have not paid for this damage in the price of coal energy for 40 years? Why is the fight to assign these costs to their producers still on the table at Congress this week?Environmental as well as health damage is also not costed into the price of other fossil fuels. Instead the fossil industries have been granted tax breaks that are estimated to have cost $72.5 billion from 2002-2008. $54 billion of that lost income has been set aside through the tax code. What is noteworthy here is that tax expenditures are not a part of the normal budget process. None of them, and once written into the code they are hard to dislodge. One oil tax expenditure, originally written to help develop the industry, will celebrate its 100th anniversary next year. This government largess wipes out any ability for the renewable industries to compete. Energy users cannot make clear economic decisions. Tax based government financial support, as well as cost shifting, skews any real price evaluation. It merely reduces the price of fossil energy and keeps the industries in business. Many more examples of distorted markets and corporate tax welfare exist … put them on the table if you want to talk competitiveness, carbon policy and corporate tax rates.http://www.ucsusa.org/clean_energy/coalvswind/c02c.html.(The True Cost Of Coal – Up To A Half Trillion Dollars Per Year to be published this month in the Annals of the New York Academy of Sciences) http://www.desmogblog.com/true-cost-coal-half-trillion-dollars-yearCredit Suisse, Growth from Subtraction)ELI.org