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Econ101

Well-known member
Commentary
from the March 14, 2005 edition

As corporate taxes shrink, who pays?
By David R. Francis
Outside in the parking lot, demonstrators held signs saying the federal income tax is unconstitutional. Inside, in a former furniture store turned software firm, President Bush's Advisory Panel on Federal Tax Reform was holding a public hearing, this one on corporate taxes.

That juxtaposition in Tampa, Fla., last week was apt. Although judges routinely knock down claims that income taxes are unconstitutional, corporate taxes are shrinking. The push is on to make them disappear completely.
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There may be some economic reasons to do that. But would the nation's tax system remain as progressive?

Mr. Bush's tax cuts reduced rates for individuals. Corporations have done even better over time. Federal revenue from corporate taxes has fallen from 6.4 percent of gross domestic product, the nation's output of goods and services, in 1951 to a mere 1.5 percent to 2 percent of GDP in the last few years.

This downward drift has resulted from three factors, says Douglas Shackleford, a tax professor at the University of North Carolina at Chapel Hill.

The first is the desire for low corporate tax rates to help domestic firms compete internationally. In the United States, Congress responds by providing various loopholes, such as accelerated or bonus depreciation and research and development deductions and credits.

A second is the rising popularity of "S corporations," mostly small companies that can pass on profits tax-free to individual owners. The profits become part of the owners' personal income and are subject to taxes there. The third factor is more corporate tax planning, including the use of tax shelters. Some of these are abusive.

A new corporate tax break, a provision of the American Jobs Creation Act, was passed by Congress last fall. It permits firms to return profits held in overseas subsidiaries to the US at a 5.25 percent flat rate, down from the maximum 35 percent corporate tax rate.

It's estimated that $100 billion to $500 billion worth of profits will make their way home from abroad this year to take advantage of the teeny tax rate. If so, the repatriation of profits may give federal revenues a bit of a boost.

Already a few pharmaceutical companies and some other multinationals have announced plans to use this tax incentive, repatriating multibillions of dollars.

"It's ludicrous - like all tax holidays," says Professor Shackleford. It creates tax favoritism for some companies.

Economists see corporate taxation in a different light from most people. They note that a company is actually just a legal paper entity, not a person. The cost of corporate taxes, they say, is passed on to real people - shareholders, employees, consumers - through lower dividends, trimmed wages, or higher prices for their products and services. Economists have been unable to agree on a distribution of the tax burden for many decades. It's just too complicated.

Asked where the burden falls now, William Gentry, an economist at Williams College in Williamstown, Mass., who testified before the tax reform panel, says primarily on capital - reducing dividends, bond interest, capital gains, and perhaps even home prices.

But probably, it also falls on consumers as companies jack up prices to cover tax costs, and on workers, whose wages don't rise as fast, says Joel Slemrod, a tax expert at the University of Michigan Business School. Nevertheless, corporate taxation is "more progressive than any other tax on the books," he adds. Its costs fall mostly on the well-to-do, who still hold the bulk of corporate stocks and bonds, despite the spread of share ownership over the past 50 years.

That view is why liberals like Bob McIntyre, director of Citizens for Tax Justice (CTJ), a Washington think tank, repeatedly bemoan the shrinking corporate tax. Last month, it released a study saying corporate tax avoidance was worse at the state than at the federal level. Last fall, CTJ complained that 82 big firms paid no taxes at all in one or more Bush years.

Many pro-business conservatives and many economists want the corporate tax eliminated, or at least integrated with the personal income tax. The presidential panel will undoubtedly consider ending "double taxation" - taxing company profits first at the corporate level, then as dividend income of individuals.

One idea being tossed around would require companies to pay income taxes, but then provide shareholders notice of the amount of that taxation in sending out dividends. Shareholders could then deduct from their taxable dividend income their share of the tax paid by the company. It would be much like employers who now deduct the federal income tax from their employees' regular wages and, after the year ends, provide information on W-2 forms about how much was deducted.

But how to keep the progressivity in the tax system could be a crucial issue for the nine-member panel, which is due to report by July. Will Mr. Bush and Congress achieve major tax reform, as was done in 1939, 1954, 1969, and 1986?

"It seems conceivable that they might come up with major legislation, if not this year, maybe next year," says Shackleford.
 

Econ101

Well-known member
Z Magazine

June 2002 Volume 15 Number 6


CorpWatch

Corporate Taxes

By David Soll

In the past year President Bush proposed, and Congress approved, a $1.6 trillion tax cut that reduced rates for most taxpayers and made some significant structural changes, including eliminating the estate tax. Corporate America felt left out when the President rammed his tax cut through Congress. “Where’s our tax cut,” it asked? “Be patient,” responded the Bush administration.

As it turns out, corporate America had to wait only a few months for its tax cut. As part of the economic stimulus package passed by Congress in mid-March, businesses were granted accelerated depreciation of new purchases. Depreciation may be an abstraction to most Americans, but the tax break will reduce corporate taxes by $43 billion this year.

Media coverage of the economic stimulus package focused on how the bill had been significantly pared down from the one first offered by House Republicans, which contained hundreds of billions in corporate tax breaks. The mainstream media treated the original measure with surprising disdain, delighting in reporting the billions in refunds the bill would have provided to some of America’s wealthiest corporations. However, once the Senate refused to grant large corporate tax breaks and House Republicans were forced to remove them from the bill, the media’s interest in corporate taxes waned. Had they continued to investigate, the media would have discovered that although House Republicans largely failed in their battle to significantly slash corporate taxes (though $43 billion is hardly pocket change), advocates of reduced corporate tax rates have been winning the war for 30 years.

According to the IRS, in 1971, corporations paid 23 percent of income taxes collected by the federal government. By the year 2000, the corporate share of taxes had fallen to 17 percent. This reduction may seem relatively minor unless we appreciate that individual taxpayers were required to fill the gap left by the effective decrease in corporate tax rates. If corporations had paid 23 percent of the income taxes collected in 2000, as they did in 1971, the federal government could have distributed an average rebate of $628 per tax filer at no net loss of revenue.

Corporations are able to avoid paying the 35 percent tax on profits called for under the law by taking advantage of thousands of loopholes. According to a study conducted by the Institute on Taxation and Economic Policy, 250 of America’s largest corporations paid an average tax rate of 20.1 percent in 1998. Many of these corporations, including Texaco, Enron, and Goodyear actually received rebates from the federal government. Indeed, one of the most striking aspects of corporate taxes is the disparate treatment received by different industries. While some industries, such as publishing and health care, pay close to the standard 35 percent rate on profits, the petroleum and forest products industries pay only 10-15 percent of their profits in taxes.

Congress, eager to appease corporate contributors, has largely ignored the issue of corporate tax avoidance. However, in the wake of the Enron scandal, a bill has been introduced in the Senate that would limit the ability of corporations to reduce their tax liability by granting employee stock options. Currently, corporations count stock options as expenses for tax purposes, thereby reducing their taxes, but often fail to include the value of options granted when reporting profits. Corporations are thus able to overstate profits, driving up their stock price, all the while limiting their tax liability.

Corporate America has banded together to fight for continued preferential tax treatment of stock options. Given corporate opposition and a House of Representatives that showered corporate America with billions in tax rebates, tax treatment of options isn’t likely to change anytime soon. However, it’s worth bearing in mind that options represent only one of numerous tax loopholes corporations can exploit to reduce their tax burden. Instead of focusing on options, Congress could adopt a more comprehensive approach that would establish a true mandatory minimum tax rate that corporations would have to pay under all circumstances.

Specifically, Congress should strengthen the Alternative Minimum Tax (AMT) on corporations. Congress established the AMT in the 1986 Tax Reform Act to ensure that profitable corporations pay at least some federal income tax. The share of income taxes paid by corporations increased after 1986. However, laws passed in the 1990s weakened the AMT, resulting in lower effective corporate tax rates. The AMT has been eviscerated to the point where many large corporations routinely receive tax rebates from the federal government.

Congress should require that corporations pay at least 20 percent of their profits in taxes. This would effectively limit the extent to which corporations could take advantage of deductions, thereby restoring a measure of fairness to a system which favors some industries over others and corporations over individual taxpayers.

In the buildup to April 15, mainstream newspapers often publish a stream of articles related to federal taxes. This year, many of those articles focused on the fact that the IRS audits low-income Americans, specifically those who receive the Earned Income Tax Credit, much more frequently than it does wealthy Americans.

Citizens should insist that Congress address the more fundamental issue of corporate tax avoidance. Creating an enforceable minimum corporate tax rate of 20 percent of profits would generate tens of billions of dollars for the U.S. Treasury. Doing so would send a signal to corporate America that playing by the rules involves more than just reforming accounting practices. Z
 
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