The Obama administration's announcement of a generous cut to the corporate statutory tax rate from 35 percent to 28 percent (for manufacturing companies, to 25 percent) is an excellent political ploy. President Obama deftly wrapped a business-friendly tax cut in job-creation lingo, a slick maneuver sure to take some wind out of the GOP candidates’ sails. Which Republican is going to vote against a 20 percent corporate-tax-rate deduction?
Before examining why this doesn’t help our economy or boost its revenues, consider the distinction between two important tax definitions that didn’t make the political fanfare. The statutory corporate tax rate, currently 35 percent, is the one companies are supposed to pay on their profits. The effective tax rate is the one they pay after deductions, offshore maneuvers, and accounting tricks. According to a recent Citizens for Tax Justice report that examined SEC annual reports, the top 280 U.S. companies, on average, paid half of the 35 percent statutory tax rate between 2008 and 2010. A quarter of those firms paid less than 10 percent taxes on their profits.
The statutory rate that U.S. corporations pay may be high compared with international standards, but the effective tax rate they pay is the second lowest among OECD countries. In 2009, the total U.S. corporate taxes collected stood at 1.3 percent of GDP, little more than half the average rate of the other OECD countries’ level of 2.4 percent of GDP. As a share of tax receipts, U.S. corporate taxes ranked 17th among 25 OECD countries, contributing 6.1 percent of revenues, against an average of 8 percent. That contribution was one of the lowest in U.S. history. Cutting the rate, even combined with closing various tax loopholes, will only reduce further what little corporations contribute as a portion of federal revenue.
The blueprint for reducing the statutory corporate tax rate was penned in a tax-reform report released by Obama’s Economic Recovery Advisory Team in August 2010. The president has strategically avoided discussing cuts to the statutory corporate tax rate, which would have annoyed his already disillusioned base. Instead, he has assiduously focused his oratorical talents on the aspects of the plan that close loopholes, provide incentives for clean energy, and bring jobs to America. Until now.
That report, the Republican Party, and current administration rhetoric stress that the high comparative statutory tax rate of the U.S. relative to other countries is anticompetitive—and job-restraining. That logic avoids mention of the effective rate, except to merge the two tax definitions and claim that the “high effective corporate tax rate in the U.S. discourages MNCs [multinational companies] from choosing it as a site for the production of goods and services.”
Obama claims this tax plan will raise $250 billion in 10 years, or $25 billion a year, from loophole closures. While eliminating unfair loopholes is a great bottom-line contributing idea, that figure is optimistic and rather arbitrary. The elements of these loopholes will be dissected and debated in Congress for months, if not years. Plus, it’s impossible to forecast how companies will restructure their books to take advantage of remaining loopholes, for even one year, let alone 10.
If the goal were bringing revenue to the government, whose debt level is now higher than the GDP, this plan would fail. But that’s not even its intent. The idea is to be “revenue-neutral.” After lobbyists and lawyers are done, this will translate to “revenue-negative.”
The math is already revenue-negative. In 2010, the amount of corporate taxes collected was 8.9 percent of federal revenues, or $187 billion. (The last time corporations paid on par with citizens was in 1943.) All things equal, reducing the statutory tax rate by 20 percent would cost $37 billion per year, or $370 billion over 10 years, 50 percent more than the $250 billion extra loophole revenues that the administration is promising.
But let’s consider the plan to reduce offshore tax dodging for a moment anyway. Of course, eliminating loopholes and fully repatriating the related profits would be a positive step toward increasing U.S. tax revenues. Obama mentioned this in all of his State of the Union addresses and major campaign speeches. So did John McCain in 2008.
But Obama’s strategy to recoup profits back to the U.S. for taxation purposes falls short of its lofty goal. The current offshore tax setup means companies that make money offshore don’t have to pay U.S. taxes on it, until they bring it onshore—which legally could be never. Hence, many U.S. companies set up offshore actual or on-paper entities to take advantage of making, or simply booking, profits there.
The plan would have companies that create “intangible” assets offshore be unable to keep related “excess profits” offshore or in “low tax countries.” But this opens tax plays up to vast interpretation (“What is excess?”), rendering the idea fairly impotent for revenue collection. Additionally, the proposed notion of levying a minimum tax on all profits is not the same as requiring all U.S. companies to repatriate all foreign profits back to the U.S. A bit of accounting magic, and companies can get around a minimum tax easily—because to a big multinational company, not paying any taxes is far preferable to paying just a little. The only way to get offshore money back is to eliminate the profit-deferral option completely. That’s not on the table.
Obama also would provide plant and equipment investment deductions, as well as tax incentives for building and hiring in communities that need jobs most, and for clean-energy projects. Yet a company isn’t going to relocate unless the cost of doing so makes sense, rebate or not, so the incentive idea, though job-friendly on the surface, in practice is like saying banks will spontaneously decide to refinance underwater mortgages.
And what of the 25 percent statutory tax rate bone thrown to manufacturing companies? It would only make a difference if they were already paying more than a 25 percent tax rate. Many aren’t.
Last week, Obama visited a Boeing plant to hype the lower tax-rate idea and applaud its job-creation acumen. Last year, Boeing was awarded a $35 billion government contract. (If anything, this shows that federal funds finance job creation.) Yet Boeing has paid zero federal income taxes in the past decade, despite bringing in $32 billion of pretax profits. Boeing even received a $2 billion tax rebate during those years. Then there’s GE, which bagged a $4.7 billion tax rebate between 2008 and 2010 on $10.5 billion of pretax profits. GE paid no federal taxes during the past three years. The list goes on.
According to a public campaign report, 30 of the top U.S. companies paid more in lobbying money (a positive number) than in taxes (a negative number, which means they got a rebate). The list included GE, PG&E, Verizon, Wells Fargo, American Electric Power, Center Point Energy, Duke Energy, Boeing, and Consolidated Edison. Some of these are the same energy companies Obama wants to offer clean-energy incentives. Sure, they’ll take them; sure, clean energy is a good idea. But they’ll also keep their negative effective tax rate—meaning negative revenue.
The bottom line is that we don’t need a revenue-neutral corporate tax plan; citizens are bearing the brunt of our tax receipts as it is. We need one that’s “revenue-positive.” Such a plan would entail both closing loopholes and keeping the statutory tax rate where it is—but that’s not the kind of policy that brings in the big campaign bucks.