The Huge Disconnect Between Congress and the Public on Business Tax Reform

If you are looking for an example of how corporate interests continue to dominate the agenda in Congress, a recent hearing on business tax reform held by the Senate Finance Committee is Exhibit A.

Over the past several years, the American public has watched as the media has continually reported on how major profitable corporations are using offshore loopholes and special interest tax breaks to get out of paying their fair share in taxes. These reports have left the American public rightly outraged. In fact, a Pew Research poll found that 82 percent of all Americans (including a majority of Republicans) say that they are bothered by corporate tax avoidance.

Given the unusually strong consensus on this issue, Tuesday’s Senate Finance Committee hearing should have focused on how to clamp down on offshore tax avoidance or curb the broad tax breaks that corporations receive. Instead, the discussion focused almost exclusively on how Congress could provide corporations with lower statutory tax rates, expanded loopholes and even bigger tax breaks.

Lawmakers are clearly disconnected from their constituents on this issue. They have bought into the enormous lobbying campaign by corporations touting the idea that U.S. corporations pay too much in taxes.

While it is true that the U.S. statutory tax rate is 35 percent, the wide swath of loopholes and breaks allow large profitable U.S. companies pay closer to 19.4 percent on average, with many companies paying nothing at all. A lot of the reason multinational corporations are able to pay such low rates is that they are allowed to avoid an estimated $695 billion in taxes on the $2.4 trillion that they hold offshore. In other words, the real problem with the tax code is not that U.S. multinationals are paying too much, but rather the fact that they are allowed to avoid so much in taxes.

Congress could shut down corporate tax avoidance and at the same time raise much-needed tax revenue tomorrow by ending the deferral and inversions loopholes. Instead, the Senate Finance hearing focused on how to enact substantial new tax cuts for corporations. For example, several participants discussed the need for the U.S. to move to a territorial tax system, a move that would dramatically increase, not decrease, the incentive for U.S. companies to shift more of their profits (and even real activities) offshore to avoid paying taxes. While this move alone would lose a huge amount of revenue, multiple panelists insisted that this tax break would not be nearly enough and that huge rate cuts would also be necessary to remain “competitive.”

If lawmakers insist on moving forward with policies that cut taxes for corporations there will almost certainly be huge policy and political consequences. Policy wise, lawmakers will find it impossible to raise enough revenue to make the public investments that are the true backbone of a competitive economy. Politically, lawmakers may find themselves on the side of hugely unpopular tax cuts that the vast majority of Americans oppose and may decide is reason enough to vote them out of office.