Ohio Sen. Rob Portman’s recent Bloomberg op-ed about corporate taxes reads like a catalogue of Chamber of Commerce talking points. He uses one misleading and inaccurate statement after another to argue that corporations will flee the United States unless we slash our corporate tax and adopt a so-called territorial tax system.
The Nature of Corporate Inversions
Toeing the corporate line, Portman pretends that corporate inversions involve companies physically leaving the United States. He writes that, “When companies leave the U.S., they take along jobs and investment, so inversions must end,” and he complains that the anti-inversion regulations issued by the Treasury Department on Sept. 22 do not address “the flaws in our tax system that drive our companies overseas.”
|The Chamber of Commerce headquarters in Washington, DC.
Inversion is actually a maneuver by which a corporation claims to the IRS that it is newly based offshore for tax purposes even though nothing about where the business is managed or located has changed. Congress can easily change the laws that allow this pretense, even if lawmakers are unable to settle on a broader overhaul of the tax system.
America’s Corporate Tax Rate
Portman makes use of the old canard that we have “the highest corporate tax rate in the developed world,” which is untrue or at best misleading. The U.S. may have the highest statutory corporate income tax rate among OECD countries, but the effective corporate income tax rate is quite low. CTJ and ITEP examined Fortune 500 corporations that were profitable each year from 2008 through 2012 and found that collectively they paid just 19.4 percent of their profits in corporate income taxes. A third of the companies paid less than 10 percent.
Even more interesting, the study also examined corporations that report earning at least a tenth of their profits offshore and found that two-thirds of these corporations actually paid lower effective rates in the United States than they paid in the other countries where they do business.
Of course, there are countries that have a much, much lower corporate tax rate than the United States or any OECD country. Bermuda and the Cayman Islands have corporate income tax rates of zero percent. Existing loopholes allow our corporations to claim that their profits are earned in these zero-tax countries (or to invert to countries like Ireland that make it even easier to do so). Lowering the U.S. tax rate from 35 percent to 25 percent as Portman advocates, would not solve that problem at all.
Worldwide vs. Territorial Taxation
Portman’s business-backed proposal would actually make corporate tax avoidance worse. He advocates for a territorial tax system, which would exempt corporations’ offshore profits. He ignores that fact that the territorial systems adopted by other OECD countries have caused a crisis of corporate tax avoidance that spurred the OECD’s Base Erosion and Profit Shifting (BEPS) project.
He further toes the corporate line by complaining that the United States imposes its corporate income tax “not only on income companies make at home, but also on income earned around the world,” but fails to mention the tax credit that prevents double taxation of these profits. He notes that corporations are allowed to defer U.S. tax on offshore profits until those profits are repatriated (brought to the U.S.). But his solution, a territorial system, would only expand deferral into an exemption for offshore profits, which is an even bigger break for any company that can make its profits appear to be earned in tax havens.
$2 Trillion Sitting Offshore
Another favored argument among corporations and their allies is to describe offshore profits as “trapped” outside the American economy by our tax system. Portman claims that “$2 trillion that could be reinvested in the U.S. economy sits in foreign bank accounts or is spent in other countries” and apparently the only solution is the sort of tax overhaul he advocates. Actually, the profits that could be repatriated are largely invested in the U.S. economy already, so any attempt to lure them here with lower taxes would be foolish. A December 2011 study of 27 corporations most likely to benefit from such a break concluded that in 2010, 46 percent of the profits held offshore were invested in U.S. assets like U.S. bank deposits, U.S. stocks, U.S. Treasury bonds and similar investments. Other offshore profits are invested in the assets of the offshore business and thus are not likely to be repatriated.
Short-term v. Long-term Revenue Effects
President Obama has said that tax reform overall should raise revenue, but the part affecting corporations and businesses should be “revenue-neutral,” meaning revenue saved from closing loopholes would be used to pay for tax rate reductions. Given that Congress used an alleged budget crisis to enact automatic spending cuts (which will be fully in effect again in 2016) to everything from Head Start to medical research, it’s utterly ridiculous that the President does not seek more revenue from corporations.
Portman wants to be even more generous to corporations than Obama. He complains that Treasury Secretary Jacob Lew has been “saying that the traditional, 10-year budget window shouldn’t apply” to the official estimates of any tax reform proposal. This may seem arcane, but it actually means that President Obama and Secretary Lew are trying to stop the sort of tricks included in the tax reform plan proposed by House Ways and Means chairman Dave Camp in February, which Camp claimed was revenue-neutral. CTJ concluded that the plan was revenue-neutral in the first decade but would then loose $1.7 trillion in the second decade.
Who Pays the Corporate Income Tax?
The most unconvincing piece of Portman’s argument is that that the nation should want to lower the corporate income tax because it’s ultimately paid by working people. But in fact the Joint Committee on Taxation, which provides all official tax estimates used by Congress, concluded in 2013 that 75 percent of the corporate income tax is ultimately paid by owners of corporate stocks and other business assets (the owners of capital). This makes it a progressive tax.
Corporations are capturing a growing share of U.S. income while paying an ever-shrinking percentage of U.S. taxes. Quarterly after-tax U.S. profits have exponentially and continually increased since 2000, only falling briefly during the recession and now raising to the highest levels on record. The U.S. may have a corporate tax problem, but contrary to Portman and his corporate allies’ claims, the problem is not that we’re taxing corporations too much.