The muddled road to overhauling US corporate taxes

Every loophole has its lover. That’s why, despite the furore that has erupted over American companies adopting foreign headquarters to reduce their taxes, it is proving so difficult to fix a corporate tax system that almost everyone agrees is badly broken.

Businesses complain that the high federal tax rate of 35 per cent on corporations is what propels them to exploit every opportunity to shave their tax bill. And Washington is listening: lowering that nominal rate in exchange for pruning the crop of special-interest deductions is a principle embraced by president Obama and Paul D Ryan, the Wisconsin Republican who is chairman of the house budget committee.

But the truth, explains Senator Carl Levin, the Michigan Democrat who has introduced two bills aimed at preventing American firms from merging with a foreign company to avoid paying taxes, is that "businesses all want to get rid of the other guy's tax deductions – and reduce rates".

To Senator Levin, Washington’s first priority should be what he labels “unjustified corporate tax loopholes”, deductions that he says do absolutely nothing to encourage economic productivity, but exist solely to reduce taxes.

Loopholes

Whether you agree that the government should subsidise gas exploration or encourage companies to invest in new machinery, Levin said, supporters can at least make a case that these deductions help the economy. Inversions, the label applied to the foreign takeovers that have captured the public’s attention partly because many Americans perceive them as unpatriotic, are mere tax dodges, he said.

With Capitol Hill stalemated, that flash of support has encouraged the Obama administration, with a push from congressional Democrats, to pursue a way to curb inversions without legislation.

But even on this issue, John A Boehner, the speaker of the house who has won Republican support to sue the president for supposedly circumventing Congress, warned the White House to work with lawmakers on ending the exodus of taxpaying corporations.

Inversions are just one of the loopholes that critics consider particularly egregious examples of gaming the system.

At the top of the list is the rule that allows American multinationals to avoid paying taxes on profits until they are brought back to the United States. Microsoft, Google and Abbott Labs, for example, have managed to escape taxes on billions of dollars in foreign profits that are nonetheless invested in United States Treasury bonds and other government securities.

The joint committee on taxation estimates that the exemption on profits that are supposedly vacationing abroad costs the federal government $50 billion a year, about 1.7 per cent of total revenue.

Those who believe corporations pay too much worry that the tax burden is putting American companies at a disadvantage in the world economy. "We've been down this road before, and we know companies will continue to do this as long as our tax rates remain the highest in the world," representative David Camp, a Republican from Michigan and the chairman of the house ways and means committee, said.

Camp, who is retiring from Congress this year, spent three years drafting a sweeping tax overhaul that was vilified by members of both parties as soon as it was released in February.

Some economists have pushed to eliminate the corporate tax altogether, replacing it with a tax on individual shareholders’ personal income, dividends and capital gains.

Those in the too-little camp maintain that many corporations already pay far less than their fair share. They point out there is little historical evidence that high rates have led to job losses or a sluggish economy.

"The idea that lowering the corporate tax rate will lead to more investment is fundamentally wrong," said Joseph Stiglitz, the Nobel-prize winning economist who has carved out a strong position as a liberal critic of Democratic and Republican government actions.

This deep split means that even if lawmakers can agree on which deductions should be eliminated, they will still be divided on the question of who should benefit.

Exemptions

Elaine C Kamarck, the co-chairwoman of a bipartisan coalition of businesses and organisations that support a tax overhaul, says the only way a tax bill will pass is to use any savings derived from closing corporate loopholes solely to lower the overall corporate tax rate.

The companies that have joined the coalition, which include Boeing, AT&T, Verizon, Walmart and Walt Disney, have agreed to put every loophole on the table, she said, because they believe "a low enough basic tax rate is worth giving up exemptions".

Many Democrats and advocates of a more progressive tax system recoil at the insistence any package be revenue-neutral. “It’s ridiculous to say, ‘We can’t close this loophole unless we give all this money back’,” said Robert S McIntyre, director of Citizens for Tax Justice, who compared it to catching a robber leaving the bank but letting him keep the money. “Everybody says we have the highest corporate tax in the world, but many corporations pay hardly anything.”

According to a study of scores of Fortune 500 companies released this year by McIntyre's group and the Institute on Taxation and Economic Policy, the average tax rate from 2008 to 2012 on utility, gas and electric companies was 2.8 percent. The rate for the industrial machinery sector was 4.3 percent, while the telecommunications industry averaged 9.8 percent. For the aerospace and military industry, it was 19.7 percent. Dozens of corporations including Verizon, Boeing and Corning paid the government absolutely nothing.

Inversions

Lobbyists for various interest groups have become experts at tax jujitsu, using the push for a full-scale overhaul by supporters against them. The view that nothing should be fixed until everything can be fixed has repeatedly derailed efforts to eliminate even the most deplored loopholes.

That wait-for-reform argument has also greeted recent bills to prevent companies from moving their headquarters abroad for a tax break.

That is precisely why Levin said he and his co-sponsors decided to simply call for a two- year moratorium on inversions. But even that will be a battle.

“The whole issue is do we wait for tax reform,” he said, “which I think is an excuse for inaction.”

© 2014 The New York Times