02.24.12

Why New Obama, Romney Tax Plans Are Going Nowhere

Let’s stop pretending that U.S. companies actually pay the 35 percent tax rate—or that any of these reform proposals will ever see light of day. Plus, find out who the ten biggest corporate tax dodgers are.

President Obama and Mitt Romney both released tax plans Wednesday.  Each enjoys approximately the same likelihood of being enacted in their entirety, which is absolutely none. (Rick Santorum’s tax plan, released last week, has, if anything, an even smaller chance of enactment.)

It’s true, as Syracuse University’s Len Berman explains, that corporate tax reform “is urgently needed. Our current tax system is a mess. We have the highest rates in the world and raise relatively little revenue. Some industries pay little or no tax, while some are taxed quite heavily. The tax distorts the way companies do business and where they choose.” Naturally, The New York Times, Bloomberg,  and various economists have all weighed in on the various pros and cons of the plans and many more will continue to do so. But the entire exercise is yet another example of the Kabuki nature of our politics.

Tax reform presents a problem for objective reporters because all discussion of it involves participating in more simultaneous shams than one can comfortably count.  The first one—the fact that the numbers discussed are almost all fiction—is well recognized, both by most reporters, but often conveniently ignored for the purpose of a clean narrative. When, for instance, you read of a current top corporate tax rate of 35 percent potentially being lowered to 28 percent in the Obama plan, you need to know that barely a quarter of companies pay anything like the official rate. While the U.S. Treasury estimates the effective U.S. marginal tax rate at 29.2 percent for all corporations, according to the Congressional Budget Office report released this week, 2011’s actual corporate tax rate was just 12.1 percent, which is the lowest level recorded since the CBO began measuring this data 40 years ago. This is true despite the fact that corporate profits are at a record proportion of national income. So when corporate flacks complain that the U.S. cannot compete for global business owing to our high tax rate, it’s, well, a bit rich.

The actual point of releasing these plans is a bit like the way teenagers pick their wardrobes: to signal which clique they like to belong to.

A second fiction that underlies all discussion of all these tax-reform plans is that tax reform is possible at all. Sure, Congress might end up lowering the overall rate that corporations pay—since nobody really cares about increasing the deficit when it comes to political payoffs—but the idea that significant loopholes can simply be eliminated from the system in the name of “fairness,” “consistency,” “expanding the base,” or curing cancer for small children is a fairy tale that only television anchors can pretend to believe. Corporations do not pay lobbyists millions of dollars to forego their tax loopholes. They do not contribute even more to political campaign kitties and post-Citizens United super PAC funds for the purposes of seeing their profit margins reduced. The U.S. tax code is an almost perfect reflection of the actual power relations that underlie our not-so-democratic system of government. Warren Buffett’s secretary pays higher taxes than her boss because she has less power. Fifty-five percent of U.S. corporations paid zero federal tax in one of the past seven years and this includes some of the wealthiest corporations in America.

The actual point of releasing these plans is a bit like the way teenagers pick their wardrobes: to signal which clique they like to belong to. Obama is with the folks who think things work pretty much OK the way they are, but things could be smoothed out a bit. He’d like to reduce the overall rate but only when we can get rid of the loopholes, which is never. It’s a nod in the direction of Republican arguments—and as always, offers the possibility of significant capitulation—while leaving himself an out in the end.  He’s the responsible one; not the dreaded “liberal” to be sure, but not one of the crazies either. So while conservatives call for a goal of 25 percent, Obama sticks to 28 because “Congress’s nonpartisan Joint Committee on Taxation, which was requested by House Democrats, reported that even if every corporate tax break were scrapped, the 35 percent corporate rate could not be reduced below 28 percent without adding to deficits.”

Meanwhile, Mitt Romney would like a tax code that is even more generous to people like Mitt Romney. He would continue the current 15 percent rate on dividends and capital gains that keep his taxes so low—which the Obama plan would raise—and cut the tax rate on everyone. Naturally when you make hundreds of millions of dollars, a percentage cut in your tax rate is worth a lot more than it is to say, his secretary or even his IT guy.  Romney would also like to get rid of both the estate tax and alternative minimum tax, and go down to just 25 percent on the top corporate rate, creating what the economist James Kwak calls “a mathematical disaster,” though to be honest, it is hardly less of one than Rick Santorum’s. None of the Republican plans do anything but explode the deficit they are always complaining about.

In a blog post entitled “Is This the End of Market Democracy?”, Thomas J. Edsall noted, “The debate over the workings of democracy, the market, technology, and globalization remains unresolved. The political system instinctively avoids this debate, despite its salience and centrality, because the political costs of engagement are likely to substantially outweigh any potential gains.”  His observation predated the candidates’ new tax plans but at the same time, predicted them. But that’s easy when it comes to issues of money and American politics: it wins, we lose.