Why would the US reward corporations, of all people, by giving them the same tax exemption that churches enjoy? Do they ever bring anyone a little salvation, redemption, or prosperity to deserve such an advantage? Already they exert too much influence for their own agenda, only, never for the public good.
Now they scheme to avoid paying taxes by moving abroad, shifting profits to foreign tax havens, and stashing huge sums of money around the world instead of paying dividends to American shareholders. At the same time, record profits convince them that paying tax is out of the question. Robert Reich and Paul Krugman wrote about the need for reform recently. This week, the Treasury Secretary said Congress must act and since it's obvious how unlikely it is that they will, he suggested he might go ahead with a solution on his own.
"Any action we take will have a strong legal and policy basis, but will not be a substitute for meaningful legislation. |
How did things come to this? When President Taft proposed a corporate tax in 1909, the idea of taxing business profits made sense.
"This is an excise tax upon the privilege of doing business as an artificial entity and of freedom from a general partnership liability enjoyed by those who own the stock. Another merit of this tax is the federal supervision which must be exercised in order to make the law effective over the annual accounts and business transactions of all corporations." |
A hundred years later, people are talking about repealing the corporate tax without asking anything of corporations in return.
Even Republicans acknowledge that a zero corporate tax rate would result in a substantial revenue loss. The revenue amounts in recent years with available statistics averaged $400 Billion.
|
Year
|
Revenue collected from corporate tax
|
|
|
2010
|
$371 Billion
|
|
|
2011
|
$379 Billion
|
|
|
2012
|
$454 Billion
|
|
Griping about the corporate tax often starts with the claim that the US marginal rate is the highest in the world. An abundance of loopholes, credits, and other giveaways reduce the tax to
an average effective rate of 13% according to Robert Reich. How does the US stack up against the rest of the G7 countries?
Country |
Top Marginal Corporate Rate |
Corporate Tax as % of GDP |
Personal Income Tax as % of GDP |
Employer's Social Security Contribution as % of GDP |
Employee's Social Security Contribution as % of GDP |
Canada |
15
|
2.9
|
11.2
|
2.4
|
2.4
|
France |
34
|
2.5
|
8.2
|
11.6
|
5.4
|
Germany |
15
|
1.8
|
9.6
|
6.8
|
7.6
|
Italy |
28
|
2.9
|
12.1
|
9.3
|
4.2
|
Japan |
26
|
3.4
|
5.4
|
-
|
-
|
United Kingdom |
23
|
2.9
|
9.7
|
3.6
|
3.2
|
United States |
35
|
2.6
|
9.0
|
2.7
|
2.7
|
As a percentage of GDP, the US corporate tax is the 3rd lowest of the G7 countries.
For context, compare the corporate tax revenue to other types of revenue collected. The US personal income tax is also the 3rd lowest of the G7. While France collects less revenue in corporate and personal income tax, employers there pay a mandatory payroll tax for social security equal to 11.6%. When scaled to the larger economy of the US, the amount would represent a $2 trillion employer contribution to fund Social Security, Disability insurance, Medicare, and Unemployment insurance. In reality, US employers contributed $800 Billion in 2012.
With globalization, competition among countries trying to create the most business friendly climate could easily become a race to the bottom. Whether the US uses a global system that taxes profits from all sources where an American corporation conducts business, or exempts profits from foreign sources, there would be advantages and disadvantages that cancel each other out, in terms of revenue collection. This is the situation that led to calls for a radical solution.
Repeal the corporate tax and offset the loss in revenue by taxing capital gains at the same rate as ordinary income instead of the current preferential rate. But using the capital gains statistics that taxpayers reported to the IRS in recent years and computing a hypothetical rate of 39.6% for the highest incomes, revenues would have fallen far short of replacing the corporate tax.(Tax statistics are available on the IRS website.)
Year |
Capital gains reported to IRS |
Capital gains reported to IRS X 39.6% |
Revenue collected from corporate tax |
2010
|
$364 Billion
|
$144 Billion
|
$371 Billion
|
2011
|
$375 Billion
|
$149 Billion
|
$379 Billion
|
2012
|
$621 Billion
|
$246 Billion
|
$454 Billion
|
A financial transaction tax of .25% on the value of equity and derivative trades would have raised another $160 Billion in 2010, still $67 Billion short of the corporate tax revenue for that year.
(Statistics for the value of securities traded are available on the US Census website.)
Shifting the corporate tax burden to individuals would be problematic. It could easily lead to the use of corporations as tax shelters.
It would also give corporate business a free ride to benefit from society without having any responsibility in return. For example, consider the widespread fracking being introduced today in a sparsely populated area of North Dakota where there’s no infrastructure to accommodate production of a million barrels of crude a day. Roads have to be built and maintained. In winter, they have to be cleared. Rapid population growth, injuries and fatalities from dangerous work, and environmental contamination from toxic chemical spills, are just a few of the problems communities in the area face. Should business that profits from crude oil production in the area have any responsibility for the costs incurred by the local communities so that they can operate?
The answer is yes.
Rather than eliminate corporate tax, another idea comes from Thomas Piketty, the economist who wrote “Capital in the Twenty-First Century.” An international agreement through the Organization for Economic Cooperation and Development would tax corporate profits and allocate the revenue to the member countries using a formula. Every major economy in the world would observe the same rules. Revenue would be distributed in proportion to the source of profits. Without havens, issues related to intellectual property would be eliminated. The OECD already eliminated tax havens for individual income tax and it’s competent enough to create a framework for fair corporate taxes.
Some of the data on the tax rates of the G7 was compiled by the OECD.