I became interested this past weekend in corporate tax rates, and I realized we are being subjected to another republican canard. My interest in the corporate tax was sparked during an exchange between John Kerry and Lindsay Graham. A video clip of their exchange went viral because Mr. Graham said McSame’s policies are an extension of Bush’s (yeah, absolutely).
Here is the clip:
Sketchy Transcript (for those with dial-up)
Stephanopoulos to Sen. Graham: are McCain's tax and healthcare policies are essentially "an extension or maybe an enhancement of the Bush policies?"
Sen. Graham answered, "Yeah, absolutely." "He wants to cut corporate tax rates; we have the second highest corporate tax rate in the world..."
Sen. Kerry interrupts: not the effective rate.
Graham nods as if he knows he is busted.
Well, what are the facts behind this debate? Join me after the jump to find out...
McCain, and the republicans , are obviously going to use corporate tax rates as a political football. What exactly is a political football? It is an issue partisanly sliced into a neat either/or that is completely out of joint with reality but can be used to galvanize your base. Republicans have them. Democrats have them. This year it seems that the corporate tax rate will be one thrown around. Now I don’t know much about tax policies in the particular, and I know next to nothing about corporate taxes. So I have been doing some research. Here is what I found. You comments are wanted. If helpful, they will be added as updates.
Here is the baseline corporate tax rate:
Corporate Income Tax Rates--2008, 2007, 2006, 2005, 2004, 2003, 2002, 2000
Taxable income over Not over Tax rate
$ 0 $ 50,000 15%
50,000 75,000 25%
75,000 100,000 34%
100,000 335,000 39%
335,000 10,000,000 34%
10,000,000 15,000,000 35%
15,000,000 18,333,333 38%
18,333,333 .......... 35%
When you factor in state corporate tax rate the average rises to about 39.3%
Now, Graham is right that the united states does pay the second highest corporate tax rate. In 2000 the rate was 39.4% which put us at the 6th highest tax rate. Now it is 39.3%, and we are the 2nd highest.
This means that foreign countries are cutting their rates. OECD countries averaged 33.6% in 2000. In 2006 the average was 28.7%. Some countries have cut their rates significantly. Ireland from 24% to 12%; Poland from 30% to 19%; Canada from 44.6% to 36%; Germany from 52% to 38%.
John McCain is proposing to cut rates from 39% to 25%, which would put us at number 25 amongst OECD countries.
McCain and republicans claim that cutting the rates would encourage business investment here in the United States and prevent companies from moving overseas to more "friendly" business environments. McCain throws in a lot of supply-side bull shit here as well. Whether lowering corporate tax rates really works in theory and practice is up for grabs (your comments are appreciated).
But here is the rub. According to the treasury department and the congressional budget office, the effective tax rate, i.e. the percentage they actually pay, is far less than the rates mentioned above. The U.S. has a high base rate but a low effective rate. This is because we have a what is called a "narrow corporate tax base," which is the result of "depreciation allowances", "special tax provisions" for particular business sectors. Thus, our actual corporate tax rates, the effective rate, is far lower than the "statutory rate and, depending on the category of investment, are similar to, only modestly higher than, or significantly lower than effective corporate tax rates in other developed countries."
Thus, the claim that we have the second highest tax rate, while right in theory, is completely false in practice. McCain won’t tell us this though.
Basically, our tax code has built in enough loopholes that corporations, just like the wealthy with their income taxes, can maneuver around the tax code. What have been the effects of these tax breaks for corporations?
In 2003, according to Treasury Department, figures show that actual corporate income tax revenues fell to $132 billion in 2003, down 36 percent from $207 billion in 2000. This is the lowest level of corporate tax revenue since 1983, and the second lowest percentage of tax revenue since 1934 (1983 was the highest).
Basically, all this is to say that McCain and company are full of shit. Or to put it more professionally, the non-partisan Congressional Research Service concluded in a recent report, "many of the concerns expressed about the corporate tax are not supported by empirical data... Claims that high U.S. rates will create problems for the United States in a global economy suffer from a misrepresentation of the U.S. tax rate compared to other countries and are less important when capital is imperfectly mobile, as it appears to be." Basically, the average effective corporate tax rate has dropped to about 25% in 2003, exactly what McCain is proposing to do! So why does he want to change the present system? read on...
Now, there are huge loopholes that allow for the large difference between the statutory rate and the effective rate. Here are some small examples that I found for 2003:
• $11 billion from tax breaks available to multinational firms operating overseas;
• $9 billion from tax breaks to promote research and experimentation; and
• $5 billion from subsidizing U.S. exports
The list could go on and on. Another problem is allowing businesses the ability to set up tax shelters.
But things get worse. Of the 275 fortune 500 companies that made profit from 2001-2003, the effective tax rate for these companies was 17%.
That is not the half of it:
• Eighty-two of the 275 companies paid zero or less in federal income taxes in at least one year from 2001 to 2003. In the years they paid no income tax, these companies earned $102 billion in pretax U.S. profits. But instead of paying the 35% rate these companies generated so many excess tax breaks that they received outright tax rebate checks from the U.S. Treasury, totaling $12.6 billion. These companies' "negative tax rates" meant that they made more after taxes than before taxes in those no-tax years.
• Twenty-eight corporations enjoyed negative federal income tax rates over the entire 2001-2003 period.
• In 2003 alone, 46 companies paid zero or less in federal income taxes. These 46 companies told their shareholders they earned U.S. pretax profits in 2003 of $42.6 billion, yet they received tax rebates totaling $5.4 billion. Almost as many companies, 42, paid no tax in 2002, reporting $43.5 billion in pretax profits, yet receiving $4.9 billion in tax rebates.
• Then in 2002 and 2003, after the law was changed to expand tax subsidies and make it easier for corporations to carry back excess tax breaks to earlier years, corporate tax refunds skyrocketed to an average of $63 billion a year - more than double the 1998-2000 average.
Next, 0.8 percent of corporations that had assets of more than $100 million accounted for more than 95 percent of all C corporation assets. We know who the loopholes benefit. We know who John McCain is trying to help. It ain’t your mom and pop start up business.
Next, McCain and company will not tell us that Charlie Rangel (D-NY) attempted to lower the corporate tax rate. But Rangel wanted to compensate for the cut by broadening the tax base, i.e. eliminating the loopholes and tax breaks already in place. The treasury department said "that the overall corporate tax burden, not just the statutory tax rate, needs to be lowered substantially and that paying for a rate cut with base broadening would reduce or eliminate its economic benefits. " Basically, the bush administrations wants to cut the statutory rate while maintaining the loopholes, ultimately lowering the effective rate even further and putting more money in the pockets of corporations.. To do so would put the rate far below our 25% effective rate as it stands now, which means we would have one of the lowest rates in the world. Since McCain does not mention broadening the tax base of corporations, I can only assume that this is exactly what he and his ilk are up to with this corporate tax rate talk.
Mr. McSame, Fool us once (GWB) shame on me........... if you fool me you can’t get fooled again.
Internet sources:
www.cbpp.org/6-4-08tax.htm
www.cbpp.org/10-16-03tax.htm
www.taxfoundation.org/blog/show/1471.html
www.reclaimdemocracy.org/corporate_welfare/real_tax_rates_plummet.php
http://www.treas.gov/...
http://www.ustreas.gov/...
http://www.house.gov/...
http://www.brookings.edu/...