The Wrongologist

What’s
Wrong Today:

Now that
corporations are people, they should be taxed like people. Corporate tax policy
is a toxic cesspool of sweetheart deals, lobbying, campaign finance and bad public
policy.

We are about to begin
a debate between the parties over corporate taxes as part of the fiscal cliff
and debt ceiling talks:

MSNBC reports that Democrats
have set forth terms for the next fiscal cliff skirmish: They want to match future
spending cuts with revenue increases by eliminating corporate tax deductions.

President Obama said last Saturday:

Sen. Dick
Durbin, D-Ill. on CNN, went further:

So, are we
talking about new revenue? Maybe not.  

The White
House’s policy
is to take the corporate tax rate down from 35% to 28% while making up the
difference by closing some large loopholes. The Treasury Department has also said
that loophole reform should be revenue
neutral.

Closing loopholes
appeals to everyone, even Republicans. Loopholes are provisions in the tax code
that exempt certain types of profit from regular taxation. For example,
multinational corporations can allocate profits to overseas operations and
reduce their tax liability by doing so.

The New York
Times editorial
 on January 7th made the argument that corporate tax
reform should also deliver higher tax revenue.

Why shouldn’t
tax reform be revenue positive?

In 2011, taxes paid by individuals made up
47.3% of Federal tax receipts while taxes paid by corporations were 7.8% of tax
receipts.
The
National Priorities Project’s chart below shows a long-term decline in
corporate tax receipts to the federal government compared to the steady share
of tax receipts provided by individuals. Another 33% of Federal tax receipts
are paid jointly by individuals and corporations in the form of payroll taxes.

Individual income
taxes make up a much larger share of all federal tax revenues than corporate
taxes do, in part because the total wages
and salaries of all Americans are much larger than the profits of all US
corporations. But, the share of federal tax revenue paid by
corporations has also declined substantially over time.

Looking at
the chart below, the effective tax rate
for corporations has fallen steadily from about 50% in the 1950’s to about 20%
today (chart on the right). The effective rate is the percentage of corporate
taxes paid, of corporate profits. While the stated corporate tax rate is 35%,
the actual rate paid by corporations is 20%.

So, when
Washington or Wall Street demagogue about lowering the stated rate from 35%, let’s
understand that few corporations are paying that today.

The chart
above (on the left) shows how nicely corporate profits have grown in dollar
terms since the 1940’s. Note that since the 1980’s, tax receipts have not kept
pace with the growth in corporate profits.

Corporate tax receipts have fallen from
around 4.5% of GDP in 1950 to about 2% of GDP today (see chart below). Back
in the 1960s federal taxes from corporations accounted for about 25% of all
federal tax revenues. Since the Reagan-era tax cuts in 1981, tax revenue from
corporations has provided less than 12% of federal revenues and are now ±10%.
During this period, corporate tax revenues fell from 4% of GDP to 2% since the
mid-1980s.  On this chart, the left axis is for the blue line that
represents corporate taxes as a % of GDP while the right axis is for the red
line, representing corporate tax receipts as a % of total tax receipts.

Based on the
facts, the tax reform conversation shouldn’t be constrained by revenue
neutrality. In fact, locking in
these historically low revenue levels, either as a share of GDP, total
receipts, or profits, would be yet another self-inflicted wound.

So, let’s
close a few Corporate Welfare loopholes:

·   Energy
companies lease almost 40 million acres of onshore land in the US and more than
40 million offshore. The government temporarily lowered royalties on oil pumped
in the Gulf of Mexico to encourage more drilling at a time of low oil prices. Oil
prices are now high, but royalty relief wasn’t rescinded, giving oil
companies a windfall of billions of dollars

·   The
mining industry leases federal land at $5 per acre and keeps all the gold,
silver, or uranium they find; we, the people, get no royalty payments at all,
even though metal prices have soared in the past 10 years

·   Farmers,
despite food prices at record highs, still get almost $5 billion annually in
direct payments, along with billions more in crop insurance and drought aid

·   US
sugar companies benefit from an import quota that keeps American sugar prices
roughly twice as high as they otherwise would be, handing the industry
guaranteed profits

·   State
and local governments give away $70 billion annually in tax breaks and
subsidies in order to lure (or keep) companies

·   The
government requires refiners to blend billions of gallons of ethanol into
gasoline annually, and hands out an ethanol tax credit. As a result, forty per
cent of corn acreage in the U.S. now goes to make ethanol. This jacks up food
prices, since less corn is grown for feed and table, and the environmental
benefit is dubious

·   The
benefit of patent protection is worth $100’s of billions a
year just to the drug industry

·   Pass
throughs of what used to be corporate income to the individual side of the tax
code, which takes advantage of lower capital gains rates, such as carried interest rules for investment companies

We live in an era defined by increasing corporate
influence and authority over the individual. The individual
has been supplanted in the political process by corporate money, legislative
influence, campaign contributions, even free speech rights.

Society
wants (and desperately needs) more tax revenues, but it also needs growth in GDP,
as that in turn grows tax revenues and general wealth.

Taxing corporations isn’t a panacea for our
current economic disaster, but the ideology that says when corporations
maximize shareholder value, society is enriched, is wrong on its face.

Taxing corporations
by ending Corporate Welfare provides some cash to help solve these problems:

We
live in a society in which the income among the bottom 99% of earners grew .5% slower than the economy grew overall,

Where
about 20% of young males are missing
from the labor force,

Where
our educational achievement is sliding down in the international standings, but
our students owe $1 trillion for their
educations,

Where
our health statistics for people under 50 are
the worst among rich countries,

Where
our level of poverty is the worst
among rich countries,

Where
our infrastructure is crumbling
and is poorer than that of our global competitors.