David Callahan, Senior Fellow, Demos
Posted: 02/26/2013 11:34 am
Elaine Kamarck and James Pinkerton both built careers in public policy as serious thinkers who weren't easy to peg and seemed unbeholden to any narrow ideology or interest group. Whether you agreed with them or not, they at least were interesting and independent.
That was then. These days, Kamarck and Pinkerton are working with big business as co-chairs of the RATE Coalition, a 501(c)4 organization dedicated to corporate tax reform -- but which makes such patently simplistic arguments in this area that it's hard to fathom how two smart people like Kamarck and Pinkerton could lend their reputations to the enterprise.
Corporate taxes are a complex subject and, to be taken seriously on this topic, it helps to acknowledge this complexity. The basic argument of the RATE Coalition -- as the name implies -- is that the U.S. corporate tax rate is too high and that this undermines U.S. competitiveness and growth. As well, the RATE Coalition argues that various corporate tax breaks distort economic activity and hurt the U.S. that way, too -- a double whammy. The solution they propose is to lower rates and close loopholes to achieve revenue-neutral reform.
This is not a novel argument, of course. The Simpson-Bowles Commission made the same argument and the Obama administration itself has called for reform along these lines. For sure, there is much to be said for a more streamlined corporate tax system which grants few special perks.
But what's problematic about the RATE Coalition's arguments -- as presented on their website and various materials, including a recent letter by 20 economists -- is that it doesn't acknowledge basic facts about U.S. corporate taxes.
The most elementary fact is this: Yes, the U.S. has the highest statutory corporate tax rate in the world, as the RATE Coalition materials emphasize at every turn, but that doesn't mean a whole lot. As any taxpayer knows, your official tax rate is in many ways far less important than what deductions you can take and what your effective tax rate is as a result -- how much you actually pay -- as well as your overall tax burden: what percentage of your income goes to taxes.
And here's the thing about corporate taxes: In fact, the effective income tax rate paid by most U.S. corporations is not out of sync with our industrial competitors, nor is the overall burden of corporate taxes -- as a percentage of GDP -- higher than the OECD average.
Start with effective tax rates. Given all the various breaks offered to corporations, you might expect that their effective rates would have little to do with statutory rates, and you'd be right. A 2011 study by the Center for Tax Justice of the country's most profitable businesses found that the average rate paid by these 280 businesses in 2008 to 2010 came out to 18.5 percent -- way below the top statutory rate. In 2011, all corporations made about $1.8 trillion in profits and paid $181 billion in federal corporate income taxes taxes, according to the OMB. They also paid $46 billion in state corporate income taxes, for a grand total of $227 billion in federal and state corporate income. That's an overall effective corporate tax rate of just under 13 percent.
Of course, as we all know, for many companies it can be much lower than that. According to the report by Citizens for Tax Justice, fully 78 of the 280 most profitable U.S. corporations had at least one year between 2008 and 2010 where they paid absolutely nothing in federal incomes taxes at all. The General Accounting Office reported in 2008 that two out of every three United States corporations paid no federal income taxes from 1998 through 2005.
So it's no surprise that just two months ago, a study by the Congressional Research Service entitled "International Corporate Tax Rate Comparisons and Policy Implications" had this to say about how the U.S. corporate tax system stacked up against other countries: "Although the U.S. statutory tax rate is higher, the average effective rate is about the same, and the marginal rate on new investment is only slightly higher."
We're also doing okay in terms of the overall tax burden. In 2010, the average corporate tax burden in OECD countries was 2.9 percent of GDP. The burden in the United States was just below that average, at 2.7 percent of GDP. In Japan, it was 3.2; the U.K., 3.1; Canada 3.3; Australia 4.8; Germany 1.5; South Korea, 3.5; and so on.
Now, as I said earlier, there are good arguments for reforming the corporate tax system to bolster the U.S. economy. Giving perks to well-connected industries, like oil and gas, doesn't make much sense. And one of the biggest problems with the system is the way it allows corporations to pile up profits in offshore tax havens untaxed thanks to deferral -- creating incentives to keep money abroad and use it to invest abroad. Analysts who say that dropping the corporate tax rate would bring that money home are naive, because the rate will never be low enough to compete with tax havens like Bermuda. Deferral should be ended and corporations should be taxed worldwide on all their profits when they make those profits.
Corporate tax reform is an interesting and complex policy debate. It's just the kind of debate where creative thinkers like Elaine Kamarck and James Pinkerton are needed. Instead, for whatever reason, they have thrown their reputations behind a corporate-funded effort that begins with an intellectually deceptive focus on tax rates and never acknowledges basic facts that anyone who follows this issue are familiar with.
We need a real debate over corporate tax reform, not one that starts with a lie.
The Huffington Post: Deception in the Corporate Tax Reform Debate