Big Business Turns Against Corporate Tax Reform
If there is one area where the White House and Congressional Republicans are in some agreement, it concerns corporate tax reform. President Obama has proposed slashing the statutory rate from 35 to 28 percent while recouping lost revenue through the elimination of corporate tax breaks costing the Treasury tens of billions of dollars each year. Paul Ryan's House GOP budget, like Mitt Romney's 2012 Republican platform, calls for an even lower 25 percent corporate rate without, of course, naming any loopholes to be closed.
But as Politico reported this week, big business groups including the U.S. Chamber of Commerce and the Business Roundtable are pouring cold water on the corporate tax reform process. The reasons are simple enough. While they are only too happy to take the rate cut, companies in most sectors of the U.S. economy currently benefit from a wide array of deductions and loopholes that now make the effective federal corporate rate closer to 13 percent of profits. And as it turns out, today's tax code enables entire industries and some of America's highest profile firms to pay Uncle Sam almost nothing at all.
Earlier this month, the Washington Post reported "an army of lobbyists has been mobilizing in the halls of Congress over recent months in anticipation of what could be a monumental struggle later this year over reforming the tax code." On Tuesday, Politico explained how business organizations and trade associations are ramping up the pressure on Congress to keep their pet loopholes open:
The U.S. Chamber of Commerce said it wants any tax rewrite to protect breaks for capital investments, such as new machinery. Pharmaceutical and technology companies are telling the House Ways and Means Committee that credits for research costs should be preserved. Energy companies don't want the treatment of expenses related to drilling touched.
It should come as no surprise that groups as diverse as the Biotechnology Industry Organization and the Wood Machinery Manufacturers of America have come out in opposition to closing favored deductions and exemptions that they say are vital to their businesses. As Politico noted, "while the current corporate tax rate is 35 percent, many companies can shave 10 to 15 percentage points, or more, off that number by taking advantage of special provisions in the code."
Or, as the New York Times documented two years ago, entire sectors shave off much, much more. As the chart above shows, "young high-tech companies often pay less than 10 percent of income in taxes, while old-line firms like railroads and utilities often pay more than 25 percent." So, while GE paid only 3.6 percent in 2010 and Facebook paid no federal tax at all last year, Target paid 37.2 percent. Thanks to mushrooming of breaks in the tax code and their transformation into multinational firms able to leverage offshore production and tax havens, 30 companies of the Dow have seen their effective tax rates halved since the 1970's. In his 2011 testimony to Congress, economist and Tax Analysts editor Martin A. Sullivan explained the disparities:
[L]ow effective tax rates are common in industries like pharmaceuticals and computer equipment where it is easy to shift technology and manufacturing to low-tax jurisdictions. In industries where customer markets and the provision of services are largely domestic, the opportunities for reducing taxes through cross-border profit shifting are limited.
The result is that the United States does not, as Republicans routinely warn, the highest corporate tax rate in the world. As ThinkProgress noted last year, "corporate profits hit a 60-year high in 2011, right as the effective corporate tax rate hit a 40-year low."
Total corporate federal taxes paid fell to 12.1% of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30, according to the Congressional Budget Office. That's the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008.
While there is broad support for lowering the statutory corporate tax rate, Republicans and their big business allies are circling the wagons around the $120 billion a year in corporate tax expenditures. (Vermont Senator Bernie Sanders' proposal to tax corporations' overseas profits at U.S. rates might raise $590 billion over ten years, but it was also dead on arrival.) As House Ways and Means Committee Chairman Dave Camp (R-MI) and his Senate counterpart Max Baucus (D-MT), the prospects for reform that includes loophole-closing "base broadening" seems remote. It's no wonder Kevin Drum ("Is Corporate Tax Reform Still Possible?") and Jonathan Chait ("Watch the Change Not Happen") had similar responses to President Obama's proposal two years ago. As Bruce Bartlett reported in January 2011, GOP anti-tax zealot Grover Norquist explained how "bipartisan reform" would have to work to get Republicans and their big business allies on board:
"I recommend taking the corporate rate to 25 percent. The Dems can suggest tax hikes if they believe they need to 'make up' revenue. That is a bipartisan division of labor."