Author: tarek

Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Taking his tax cut efforts one step further this election year, Cuomo is now proposing to expend the entirety of his state’s hard-won budget surplus on more than $2 billion in annual tax cuts.

While the term “budget surplus” may make it sound like that there is extra money lying around in Albany, the reality is that the surplus is the product of five consecutive years of austerity budgets and a budget plan that would continue this austerity for years to come. In other words, rather than using the surplus to restore funding to state and local services that have taken a hit over the past years, Cuomo is insisting that the money be used for tax cuts (many permanent) instead.

Unfortunately, tax cutting has become a pattern during Cuomo’s time as governor. In June 2011, Cuomo pushed through a property tax cap, which severely limited the ability of cash-strapped local governments to raise enough revenue to fund basic services. In December of the same year, Cuomo further starved the state of much needed revenue by killing efforts to fully extend a millionaire’s surtax, and instead pushing through a scaled back surcharge that raised half as much revenue as the original. Just last year, Cuomo pushed through a program of unproven and expensive corporate tax breaks, which a CTJ investigation found could actually harm many existing New York companies.

Even worse, to defend his past and newest tax cut proposals, Cuomo has embraced the cringe-worthy rhetoric of anti-tax governors like Kansas Governor Sam Brownback in arguing that ending “high taxes” and enacting corporate tax breaks will make the state more “business-friendly” and help improve New York’s economy. The problem, of course, is that taxes are crucial to funding what really drives economic development: a highly educated workforce, good infrastructure and quality healthcare.

Cuomo’s anti-tax approach is in direct contrast to the newly-elected New York City Mayor, Bill de Blasio, who ran and won a landslide victory on a campaign platform of addressing growing income inequality primarily through hiking taxes on the rich to provide universal citywide pre-kindergarten classes. De Blasio’s call for higher taxes has proven not only popular in New York City, but also garnered the support of 63% of New York voters statewide. What de Blasio’s election proves is that a significant majority of New Yorkers, unlike Cuomo, are not only willing to forgo tax cuts, but are actually willing to support higher taxes in order to help fund critical public services.

Cuomo’s Tax Proposal a Mixed Bag in Terms of Tax Fairness

While many of Cuomo’s past tax proposals have offered little or nothing to those in need, Cuomo’s new plan does includes a few potentially good ideas as well as few a very bad ones. On the good side of things, Cuomo proposes to substantially expand the state’s property tax circuit breaker and create a renters credit, which could potentially provide a well-targeted income boost to low-income families. While the proposals sound good, their effectiveness will really depend on their details, which are yet to be released.

Regrettably, Cuomo is also proposing a significant cut in the state’s corporate income and estate taxes, which will almost exclusively go to only a very small portion of the richest New Yorkers. Considering the recent series of tax cuts already passed by Cuomo and the years of budget cuts, piling on these additional tax breaks for the rich is simply unconscionable and would make an already unfair tax system (PDF) even worse.

How worried should we be that Boeing argues it should get a tax break for performing safety tests on its new planes? This is the argument the corporation seems to have made at an IRS hearing on January 8 and in comments submitted (sorry, subscription only) to the agency about proposed regulations governing tax breaks for research.

Tax breaks designed to encourage research can only be said to be effective if they result in their recipients conducting research that they would not otherwise conduct. Boeing seems to argue that this includes safety testing of airplanes. But isn’t this something that Boeing must do anyway?

On one hand, if Boeing is not naturally inclined, in the absence of a tax incentive, to make its planes safe, you might want to consider that before you book your next flight. On the other hand, if we trust that the FAA and comparable foreign agencies have stringent safety requirements, then why does Boeing need a tax incentive to do what is required by law?

In its comments on the regulations, Boeing criticizing a proposed “shrinking-back rule” that would provide the research tax break only for companies that develop and test individual components of an aircraft rather than those who put together and test the entire aircraft (which is what Boeing does). Another issue Boeing raises is whether it can receive the break for multiple pilot models (prototype planes, for example) for safety testing.

Boeing argues that “in the aerospace industry, companies such as Boeing that have built tens of thousands of aircraft through the years know from experience that they need multiple pilot models for testing. Indeed, without multiple pilot models, a failure may not be correctly identified as a design problem or a unique problem encountered by the pilot model because of, for example, a defect in materials.”

To which the sensible response seems to be, so what? Are we supposed to believe that Boeing will not do the appropriate safety testing if it does not receive a tax incentive for doing so? Indeed, Boeing goes on at length about the FAA safety standards it must meet through testing.

Firms are allowed to deduct their business expenses each year, except that capital expenses (expenditures to acquire assets that generate income in the future) must usually be deducted over a number of years to reflect their ongoing usefulness. In 1954, Congress enacted section 174 of the tax code, which relaxed the normal capitalization rules by allowing firms to deduct immediately their costs of research. This immediate deduction is the specific tax break addressed by the proposed regulation that is causing Boeing so much angst.

But that’s not all that’s at stake. Businesses must meet the requirements of section 174 (and some additional requirements) to get an even bigger break, the research tax credit, which was first enacted in 1981.  Of those corporations that make public how much they claim in research tax credits, Boeing is near the top of the list. This is illustrated in the table, which was published in our recent report on the many problems with the research tax credit.

You really have to hand it to Boeing. The company has managed to have billions in profits for a decade while paying nothing in federal or state corporate income taxes over that period. Yet, President Obama argues that companies that use tax breaks to shift operations and profits offshore ought to pay more U.S. taxes and that the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.” Likewise, after Washington State recently gave Boeing the biggest state tax break in history, other states like Missouri still seem to think they can lure the corporation by lavishing it with even more tax breaks. At this rate, Boeing could probably threaten that its planes will explode midair if it doesn’t get more tax breaks, and the Treasury Department and Congress probably would provide them.

Several reports released by the Congressional Research Service (CRS) in the first week of January refute claims that tax rate reductions will boost the economy and even pay for themselves by generating economic growth.

Changes in Personal Income Tax Rates

A report released on January 2 “summarizes the evidence on the relationship between tax rates and economic growth” and finds “little relationship with either top marginal rates or average marginal rates on labor income.” It also finds that work effort and savings are “relatively insensitive to tax rates.”

While many advocates of tax cuts claim that a high top marginal personal income tax rate hinders investment by the wealthy, the report finds that “periods of lower taxes are not associated with higher rates of economic growth or increases in investment.”

The January 2 report also concludes, “Claims that the cost of tax reductions are significantly reduced by feedback effects do not appear to be justified by the evidence.” Many advocates for tax cuts claim that reducing tax rates will cause so much growth of income and profits that the additional taxes collected (the “revenue feedback effects”) will replace much of the revenue lost from the rate reduction.

But the report explains that “the models with responses most consistent with empirical evidence suggest a revenue feedback effect of about 1% for the 2001-2004 Bush tax cuts,” meaning the effects that the tax cuts had on the economy and on behavior of taxpayers offset just 1 percent of their total cost. And much of this effect may have taken the form of taxpayers changing how many deductions they take, and other tax planning changes, rather than actual economic growth.

Even cuts in tax rates for capital gains, which are often argued to have the most significant “revenue feedback effects,” don’t come close to paying for themselves.

“Capital gains taxes have been scored for some time as having a significant feedback effect through changes in realizations, one that had a revenue offset of around 60 percent,” the report explains.  In other words, some analysts have claimed that a tax cut for capital gains increases those gains to such an enormous degree that up to 60 percent of the lost tax revenue is ultimately regained.

But the report explains, “More recent estimates, however, have suggested a feedback effect of about 20 percent.” CRS’s descriptions of these more recent estimates have been used in CTJ’s analyses of capital gains tax changes and are explained in the appendix to this report. (Another CTJ report proposes coupling higher capital gains tax rates with a policy change that would largely eliminate any negative effect on revenue.)

Changes in the Corporate Income Tax

The idea of changing the corporate income tax rate has received so much attention that the topic apparently warranted a separate report, which CRS released on January 6.

“Claims that behavioral responses could cause revenue to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis,” the report explains. It also shoots down the argument that the corporate tax is a regressive tax because it chases investment offshore in a way that ends up hurting American workers.

This report goes into great detail about some of the problems with the studies that advocates of reducing corporate tax rates rely on. Much of the report details how CRS, using the same data and methods found in these studies, found that the results either disappeared or became insignificant after correcting for various errors

For example, the CRS report cites an op-ed published by R. Glen Hubbard, chairman of President George W. Bush’s Council of Economic Advisers. In it, Hubbard cites a study by Kevin A. Hassett and Aparna Mathur that was rife with methodological problems.

As the CRS report explains, Hassett and Mathur conclude that “a 1% increase in the corporate tax causes manufacturing wages to fall by 0.8% to 1%. These results are impossible, however, to reconcile with the magnitudes in the economy… corporate taxes are only about 2.5% of GDP, while labor income is about two thirds. These results imply that a dollar increase in the corporate tax would decrease wages by $22 to $26, an effect that no model could ever come close to predicting.” A later report by Hassett and Mathur “continued to produce implausible estimates” because it “implies a decrease of $13 in wages for each dollar fall in corporate taxes.”

To take another example, the CRS report also examines a cross-country study concluding that corporate taxes reduce investment. But CRS finds that some of the results seem to be affected by countries that are outliers, like Bolivia, for which a transaction tax is mistakenly counted as a corporate income tax. When such mistakes are corrected, the results are found to no longer be statistically significant.

This CRS report is particularly helpful because advocates of cutting the corporate income tax rate often rely on econometric studies that they claim support their case. These studies are often mind-numbingly complicated and it is rare that policymakers or their aides have the time and ability to go through these studies to understand whether or not they actually make sense. Thankfully, the Congressional Research Service has done that job for everyone.

You might be surprised to learn that Congress is likely to extend a tax break that is claimed mostly by high-income individuals paying for graduate education and by families of undergrads who are mistakenly taking this break instead of one that would benefit them more.

The deduction for tuition and related fees is part of the “tax extenders,” which is the nickname often given to a package of provisions that Congress approves every couple of years to extend various arcane tax breaks that mostly go to businesses. This deduction is one relatively small piece of the larger “tax extenders” package, and it’s one that does go to families. But unfortunately, it’s also the most regressive of all the tax breaks for postsecondary education, meaning it’s targeted more to the wealthy than any other education tax break.

Congress last extended the deduction for tuition and related fees in the tax extenders package that was included in the “fiscal cliff” legislation approved on January 1 of 2013. That legislation extended it retroactively to 2012 and prospectively through the end of 2013. The two-year extension cost $1.7 billion.

Here’s a list of reasons why Congress should allow it to remain expired.

The deduction for tuition and related fees mainly supports graduate education.

Americans paying for undergraduate education for themselves or their kids in 2009 or later generally have no reason to use the deduction because starting that year another break for postsecondary education was expanded and became more advantageous. The more advantageous tax break is the American Opportunity Tax Credit (AOTC), which has a maximum value of $2,500. The deduction for tuition and related fees, in contrast, can be taken for a maximum of $4,000, and since it’s a deduction that means the actual tax savings even for someone in the highest income tax bracket (39.6 percent) cannot be more than $1,584.

The AOTC is more generous across the board. Under current law, the AOTC is phased out for married couples with incomes between $160,000 and $180,000, whereas the deduction for tuition and related fees is phased out for couples with incomes between $130,000 and $160,000. For moderate-income families, the AOTC is more beneficial because it is a credit rather than a deduction.   The working families who pay payroll and other taxes but earn too little to owe federal income taxes – meaning they cannot use many tax credits – benefit from the AOTC’s partial refundability (up to $1,000).

Given that a taxpayer cannot take both the AOTC and the deduction, why would anyone ever take the deduction? The AOTC is available only for four years, which means it would normally be used for undergraduate education, while the deduction could be used for graduate education or in situations in which undergraduate education takes longer than four years.  The deduction can also be used for students who enroll for only a class or two, while the AOTC is also only available to students enrolled at least half-time for an academic period during the year.

For graduate students and others in extended education, under current law the Lifetime Learning Credit (LLC) is generally a better deal than the tuition and fees deduction. Because the upper income limit for the LLC is lower — $124,000 if married, $62,000 if single, the tuition and fees deduction primarily benefits taxpayers whose income is above these thresholds.

Taxpayers confused by all the education tax breaks may mistakenly take the deduction rather than a tax break that benefits them more.

One reason a family paying for undergraduate education would claim the deduction instead of the AOTC is confusion. Because the panoply of education tax breaks is so confusing, many taxpayers mistakenly claim a break that is not the best deal for them. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible for postsecondary education tax breaks don’t take advantage of them, and those who do use them often don’t use the most advantageous tax break for their situation.

The deduction for tuition and related fees is the most regressive tax break for postsecondary education.

The distribution of these tax breaks among income groups is important because if their purpose is to encourage people to obtain education, they will be more effective if they are targeted to lower-income households that could not otherwise afford college rather than well-off families that will send their kids to college no matter what.

The graph below was produced by the Center for Law and Social Policy (CLASP) using data from the Tax Policy Center, and compares the distribution of various tax breaks for postsecondary education as well as Pell Grants.

The graph illustrates that not all tax breaks for postsecondary education are the same, and the deduction for tuition and fees is the most regressive of the bunch. Some of these tax breaks are more targeted to those who really need them, although none are nearly as well-targeted to low-income households as Pell Grants. Tax cuts for higher education taken together are not well-targeted, as illustrated in the bar graph below.

One proposal offered by CLASP would expand the refundability of the American Opportunity Tax Credit (AOTC), represented by the blue bar above, increasing the assistance available to low-income families not helped by the other tax breaks. The proposal offsets these costs — and simplifies higher education tax aid – by eliminating the other tax breaks and reducing AOTC benefits for higher income households

Much like their colleagues to the north, District of Columbia lawmakers are giving serious thought to cutting taxes now that an election is approaching.  According to the Washington Post, “10 of the council’s 13 members [are] running for re-election or higher office this year.”  It should come as little surprise, then, that the Council recently voiced unanimous support for a generous (but ill-conceived) property tax break for one of the city’s most politically popular groups—its senior citizens.  More encouraging, however, was the Council’s decision to delay action on an even more problematic bill that would have showered most of its benefits on owners of the city’s most valuable homes.

The first bill, introduced by Councilmember Anita Bonds, completely eliminates the property tax for any long-term DC resident over age 75 as long as they earn less than $60,000 per year.  But as Ed Lazere of the DC Fiscal Policy Institute (DCFPI) points out: “If you’re 74, you get nothing … If you’re 75, you have your taxes entirely limited.”  While it’s true that some senior citizens struggle with their property tax liabilities because they are “house-rich” but “cash-poor,” this isn’t a problem limited to taxpayers over age 75.

Rather than wiping out property taxes altogether for those taxpayers fortunate enough to have lived a long life, the District is better off providing this kind of relief more broadly through its property tax “circuit breaker” credit.  The credit, which is currently being expanded, will soon be available to both renters and homeowners of all ages earning up to $50,000 per year.  It also uses a more sophisticated formula than Bonds’ proposal to ensure that Washingtonians’ property tax bills do not exceed the income they have available to pay those bills.  An expert commission created by the Council recently recommended making no further changes to DC’s property tax system, but if the Council nonetheless wants to charge ahead with property tax cuts, the city’s circuit breaker credit is the better tool for the job.

The second bill, introduced by Councilmember (and current mayoral candidate) Jack Evans, would have tightened the District’s existing property tax cap to prevent tax increases of more than 5 percent per year.  As the Institute on Taxation and Economic Policy (ITEP) explains, these kinds of tax caps are poorly targeted, extremely costly, and often grossly inequitable.  Most of the tax breaks doled out under such a cap would flow to owners of expensive homes.  For example, DCFPI estimates that nearly two-thirds of the benefits of Evans’ proposal would go to owners of homes worth over $550,000, despite the fact that this group makes up just 31 percent of all DC homeowners.  Further inequity arises when, for example, a resident who has owned their current home for a number of years (and racked up substantial tax cap benefits over that time) ends up enjoying a significantly lower tax bill than the first-time homebuyer in an identical rowhouse next door.

Mayor Vince Gray opposes the 5 percent property tax cap because of its “negative financial impact on the District’s revenues, its inequitable treatment of District homeowners and because it does not increase the District’s competitiveness regionally.”  These objections are well stated, though all of them also apply, to a lesser extent, to the over-75 giveaway sought by Councilmember Bonds.

Wisconsin Governor Scott Walker wants 2014 to be a year of discussion about the pros and cons of eliminating Wisconsin’s most progressive revenue sources—the corporate and personal income taxes.  But Wisconsinites may not need a full year to see the folly of this approach.

It took mere months for Louisiana and Nebraska to abandon their misguided efforts toward income tax elimination. And the Institute on Taxation and Economic Policy (ITEP) recently found that if Wisconsin were to go this route, the state sales tax rate would need to rise to a whopping (highest in the nation) 13.5 percent if cuts in public investments are to be avoided. Wisconsin taxpayers will likely come to the conclusion rather quickly that nearly tripling their sales tax rate isn’t in their best interest.

In terms of how this sort of shift would affect real Wisconsinites, this post from the Wisconsin Budget Project sums it up: “Governor Walker’s Tax Shift Plan Would Raise Taxes for Most.” In fact, ITEP found that the bottom 80 percent of the income distribution would likely see a net tax hike if the sales tax were raised to offset the huge revenue loss associated with income tax elimination.

Almost every American would agree that education is a fundamental right. Any serious commitment to the notion of “equal opportunity” means ensuring that kids have an opportunity for a quality education—and that this opportunity should be as available to the very poor as it always has been to the very rich. As it happens, every state’s constitution includes a provision guaranteeing a basic education to its residents. But as an excellent op-ed in today’s New York Times notes, if some Kansas policymakers have their way, that state’s constitutional guarantees may be the latest victim of Governor Sam Brownback’s income tax cuts.

It’s worth reviewing how Kansas lawmakers found themselves talking about jettisoning fundamental constitutional rights. In 2012, Governor Brownback pushed through huge tax cuts for the affluent based, in part, on the argument that these tax cuts would be largely self-financing. (Brownback was apparently influenced heavily by the half-baked supply-side claims of Arthur Laffer that cutting income taxes will automatically spur economic growth.) Rather than requiring harmful cuts in state and local public investments, Brownback argued, his tax cuts would be “a shot of adrenaline into the heart of the Kansas economy,” generating new economic activity that would actually boost tax collections.  But as the Center on Budget and Policy Priorities notes, it hasn’t worked out that way. State lawmakers were forced to enact substantial spending cuts across the board, and per-pupil funding plummeted from nearly $4,500 less than a decade ago to $3,838 last year. After a group of Kansas parents brought suit against the state, a lower state court ruled (PDF) that these cuts were an unconstitutional violation of the state’s basic education guarantees—and prescribed a remedy that returns per-pupil funding to the levels achieved in the last decade.

In response to the court’s finding (which is now being reviewed by the state Supreme Court), policymakers in the Brownback administration have argued that the court’s mandate for more school spending prevents them from adjusting spending levels to reflect economic downturns. As the state’s solicitor general argued last year, “The Legislature has to deal with the real world…the constitution shouldn’t be a suicide pact.” But this argument is ludicrous: as the court sensibly pointed out in its ruling, state lawmakers gutted education spending at the same time that they were pushing through huge tax cuts, making it “completely illogical” to argue that the unconstitutional education cuts are anything other than “self-inflicted.” Notwithstanding this, some policymakers have called for amending the state constitution to modify or even eliminate the guarantee of a basic education in response to this ruling. In other words, when the state constitution conflicts with supply-side tax cuts, it must be the constitution’s fault.  

The good news is that most other states have, so far, resisted the siren call of Laffer’s calls for huge income tax cuts. But in Kansas, some policymakers are so enamored with the Brownback tax cuts that they appear to be willing to write off their most basic constitutional guarantees. 

2014 is just a few days old, and already it’s not off to such a happy start in terms of tax fairness:

This editorial in the Kansas City Star predicts that in Missouri, “[m]any state lawmakers, and their constituents, found 2013 to be a taxing legislative session. But it may pale in comparison to what’s ahead in 2014.” Republican legislators aren’t going to give up on “tax reform” after their failure to override Governor Jay Nixon’s veto of an extreme tax plan last year. Instead, those lawmakers are pledging to propose another round of income tax cuts and potentially a ballot initiative if the tax cuts can’t be passed through the legislative process.

The proliferation of state film tax incentives among states seeking to siphon off Hollywood production spending has been widely criticized. But the fact that some in California are now contemplating enacting film tax breaks to prevent a home-grown industry from leaving the state is a stark reminder that the “race to the bottom” in state corporate income taxes will leave every state poorer.

January 1st marked the beginning of a new, highly regressive era in North Carolina tax policy.  An array of tax changes went into effect which will further shift the responsibility for paying for North Carolina’s public investments away from wealthy households and profitable corporations onto the backs of middle- and low-income families.  Most notable among the changes includes the collapse of the state’s graduated personal income tax structure which was replaced with a flat rate of just 5.8% and allowing the state’s Earned Income Tax Credit to expire. Lawmakers who championed the tax package have falsely claimed for months that every North Carolina taxpayer will benefit from the changes.  As  ITEP and the NC Budget and Tax Center have repeatedly pointed out (and NC fact-checking reporters and the NC Fiscal Research division have substantiated), many families will pay more.  

This week, the Small Business Development Committee in the Wisconsin Assembly heard a bill about two proposed sales tax holidays. The first two-day holiday would be held in early August and would suspend the state’s 5 percent sales tax on computers and back-to-school items. The other two-day holiday would take place in November and be available for Energy Star products. Thankfully the proposal seems to be getting mixed reviews. Senate Majority Leader Scott Fitzgerald views the proposal as a gimmick and he couldn’t be more right. For more information read ITEP’s Policy Brief.

General Electric has long been a flashpoint in corporate tax reform debates. As long ago as 1984, CTJ’s revelation that GE and other large companies had managed to avoid paying even a dime of tax on billions in US profits prompted President Ronald Reagan to push for loophole-closing tax reform. And as our more recent research has shown, GE remains a topflight tax avoider, paying about two percent of its profits in US federal income taxes over the decade between 2002 and 2011.

So anytime one of the biggest tax dodges available to GE disappears, it should be seen as a victory for tax reform.

Why, then, is there so little excitement about the expiration, on December 31 of 2013, of the “active financing exception” that GE relies so heavily on to reduce its tax bill? Perhaps it’s because its expiration was an accidental byproduct of lawmakers’ inaction, and because Congressional tax writers have every intention of bringing this lamentable tax loophole back from the dead, as they have multiple times in the past decade. Repealed as part of the loophole-closing Tax Reform Act of 1986, the active financing loophole was temporarily reinstated in 1997 after fierce lobbying by GE and other multinational companies, and has been extended numerous times since them, usually for one or two years at a time.

The active financing exception is usually extended as part of the so-called “extenders,” the legislation that Congress enacts every couple of years to extend a package of (ostensibly temporary) tax breaks for business interests. The last extenders package was enacted as part of the fiscal cliff deal at the start of 2013, and it extended the active financing break retroactively into 2012 and prospectively through 2013. The two-year extension cost over $11 billion, making it the third most expensive of the extenders.

American corporations are allowed to indefinitely “defer” paying U.S. taxes on their offshore profits, but there is a general rule (often called “subpart F” in reference to the part of the tax code that spells it out) that corporations cannot defer U.S. taxes on dividends, interest or other types of “passive” income because these types of income are easy to shift around from one country to another to avoid taxes. The “active financing exception” is an exception to subpart F. As a result of this ”exception,” companies like GE can indefinitely avoid paying taxes to any nation on their financing income, simply by claiming that their US-based financing income is actually being earned in offshore tax havens.

GE won’t disclose just how valuable the active financing rule is to their bottom line. But when the tax break was set to expire in 2008, the head of the company’s tax department infamously went down on one knee in the office of the Ways and Means Committee chairman Charles Rangel to beg for its extension. And the company’s 2012 annual report’s discussion of risk factors facing the company’s bottom line says that “[i]f this provision is not extended, we expect our effective tax rate to increase significantly.”

And GE’s not the only company that is chomping at the bit to bring this tax break back. The active financing exception also plays a significant role in the ability of other large U.S.-based financial institutions to pay low effective rates. As a group, the financial industry has one of the lowest effective rates of all industries, averaging only 15.5% for the years 2008-2010.

With the lobbying power of GE and the financial services industry at their doors, it’s sadly no surprise that Congressional lawmakers are likely to ride to the rescue of these low-tax multinationals once again. But the $11.2 billion two-year price tag of the active-financing giveaway should be a good enough reason for Congress to sit on their hands and let this tax giveaway stay dead. 

Another year, another campaign to give even bigger breaks to corporations and claim that this will create jobs. In 2014, the campaign opened with a January 5 op-ed by Laurence Kotlikoff in the New York Times titled, “Abolish the Corporate Income Tax.”

Before getting into Kotlikoff’s argument, let’s just remember a few reasons why we have a corporate income tax.

First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.

This last point deserves emphasis. Proponents of corporate tax breaks argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes investment (and thus jobs) offshore. But most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital (owners of corporate stocks and business assets), who mostly have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of the Treasury concludes that 82 percent of the corporate tax is borne by the owners of capital. As a result, the richest one percent of Americans pay 43 percent of the tax, and the richest 5 percent pay 58 percent of the tax.

But Kotlikoff argues that our corporate income tax chases investment out of the U.S. and his simplistic answer is to repeal the tax altogether. He writes that, “To avoid our federal corporate tax, they [corporations] can, and often do, move their operations and jobs abroad,” and cites the well-known case of Apple booking profits offshore.

But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens. These gimmicks take advantage of the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits they claim to earn abroad. Lawmakers will end these abuses when they see that voters’ anger over corporate tax loopholes is even more powerful than the corporate lobby.

Kotlikoff has constructed a computer model that purports to prove that the economy would benefit greatly from cuts in the corporate income tax. But any such model relies on assumptions about how corporations would respond to changes in tax policy. Economists have failed to demonstrate a link between lower corporate taxes and economic growth over the past several decades that would justify the assumptions Kotlikoff uses.

In fact, Kotlikoff’s assumptions are at odds with the historical record. As former Reagan Treasury official, J. Gregory Ballentine, once told Business Week, “It’s very difficult to find much relationship between [corporate tax breaks] and investment. In 1981 manufacturing had its largest tax cut ever and immediately went down the tubes. In 1986 they had their largest tax increase and went gangbusters [on investment].”

In any event, the U.S. corporate tax is effectively already among the lowest in the developed world because of its many loopholes. According to the Department of the Treasury, federal corporate tax revenue in the U.S. was equal to 1.3 percent of our economy in 2010 (1.6 percent if you include state corporate taxes). The average for OECD countries (which include most of the developed countries) besides the U.S. was 2.8 percent.