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05.31.11

America's Corporate Tax Fiasco

As the budget battle resumes, one proposed fix—decreasing corporate taxes, but ending loopholes and subsidies—fights for traction. Zachary Karabell weighs in a series on regulatory policy, sponsored by Xerox.

Washington is entering its summer of discontent, with no resolution of the budget and debt issues that will push the federal government to the brink of insolvency in early August. Among the many divisive issues: what to do about taxes in general and corporate taxes in particular.

But where the ideological divisions over individual taxes are sharp and clear—with Republicans and Tea Partiers opposed to all increases and Democrats and the Obama administration committed to rolling back the Bush-era tax cuts on the wealthy, the lines are muddier when it comes to corporate taxes. That doesn't make resolution any easier, but given the unequivocal destructiveness of American corporate tax policy, the solution should be clear.

Put simply, American corporate tax policy manages to both undermine the attractiveness of the United States as a place to do business and undercut the ability of the federal government to collect needed revenue. The official rate stands at 35 percent. Add in state levies and it is just shy of 40 percent—the second-highest in the developed world, trailing only Japan, according the Organization for Economic Cooperation and Development. Perhaps most striking about this figure is how much higher it is than rates in countries widely derided in popular U.S. imagination as "socialist," including France, Denmark, Sweden, not to mention China.

In an increasingly dynamic and competitive world, the punitive rate of U.S. corporate taxes is a strong disincentive for multinationals to focus on the United States as a place to do business. Add in the peculiar fact that corporate profits are taxed only if they are repatriated to America, and you get one of the primary reasons why as much as $2 trillion is held outside the United States. Hence that 2004 so-called American Jobs Creation Act, which provided a brief tax holiday that allowed companies to bring those profits back to the U.S. without incurring that penalty in the hope—a false one it turned out—that they would hire more American workers.

These facts are not lost on the right. House Speaker John Boehner several weeks ago reiterated his stance, saying that, "If we want to put Americans back to work…lowering the corporate tax rate is critically important." At the same time, however, he acknowledged the validity of one of the main objections of the left: the corporate tax rate might be high, but many companies don't actually pay it.

What seems to elide both is that the United States is no longer the axis around which the global economy revolves.

Indeed, a Government Accountability Office study in 2008 indicated that more than half of American companies pay no federal income tax, and when benefits such as energy and agricultural subsidies are factored in, some companies are actually getting paid by the government to do business. Then there are the myriad loopholes and gimmicks—all legal within the labyrinthine tax code—that allow companies to pay significantly less, in many cases closer to 20 percent than to the stated higher rates. Even that, however, is considerably higher than elsewhere in the world.

The joint result of very high stated rates and multiple subsidies and loopholes that lower the actual rate is that companies simultaneously view the United States as an unfriendly environment to invest and do business and are able to avoid paying substantial revenue to an American government that is sorely in need of it.

The left-right dynamic in the United States has made a coherent debate well nigh impossible. The left has reacted to calls for lowering the rate—calls which have admittedly come from places such as the libertarian Cato Institute and pure right institutions such as the Heritage Foundation—as yet another giveaway to the rich and privileged. The fact that corporate titans such as Cisco's John Chambers calls the U.S. system a "dinosaur" is treated as a case in point: if corporations and the right are for something, it must be venal and wrong.

But then there is the Obama administration and Treasury Secretary Tim Geithner, who have joined the call for lowering corporate taxes. Again, on the left, that is seen as yet another indication that Obama and especially Geithner have been in the pocket of Wall Street rather than true progressives. Yet the Obama administration has married its call for lower rates with a demand that subsidies and loopholes for oil companies et al as well as tax breaks for the wealthy also come to an end. And until recently, that has met with equal opprobrium on the right.

The need to break the impasse in Washington—which will come to head in August when the government will run out of money unless the debt ceiling is raised and will continue with the fight over next year's budget—may force an unexpected and sober rationality. Democrats and Republicans, libertarians, Tea Partiers, and free-marketers may recognize that eliminating many subsidies and lowering the corporate rate gives everyone something and the country quite a lot. It would end a covert state-subsidy of big business on the one hand while also forcing Americans to end the illusion that the world will do business in the United States simply because this is America, dammit.

Yet, there are ample signs that an elegant simple solution is not in the offing. The left is determined to hold the line against anything that smacks as handouts to the rich and to corporations against a backdrop of high unemployment, stagnant wages, and the yawning gap between those doing well and those not. The right acts as if subsidies aren't really an issue and that loopholes are a natural response to unduly high rates, and views the federal government as taxing too much and spending badly.

What seems to elide both is that the United States is no longer the axis around which the global economy revolves. Corporate tax policy continues to be argued in the context of a false sense of centrality. It is an inane stance given just how dynamic and appealing much of the world has become for business and capital—and how increasingly less attractive the United States is in spite of its still vast wealth, avaricious consumers, and sophisticated economic infrastructure.

Altering the corporate tax code would be a recognition that our domestic health and international competitiveness are linked, and how we tax companies with global choices will shape the level of American affluence in the years to come. This shouldn't be an issue of ideology; it should be a question of our shared future. That would be bold and new. How sad that it appears so unlikely.

Correction: This article incorrectly described U.S. corporate tax rates as being lower, not higher, than France, Denmark, Sweden, and China.

Zachary Karabell is President of River Twice Research  and River Twice Capital. A regular commentator on CNBC and columnist for Time, he is the co-author of Sustainable Excellence: The Future of Business in a Fast-Changing World and Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends On It.