Fix corporate taxes to increase competitiveness

an improved USA government economic tax strategy

USA Today "Editorial Opinion" 3/30/11.   The top federal corporate tax rate is 35%. But don't tell that to General Electric. It paid zero taxes on $4.2 billion in domestic income last year. In fact, GE is the largest of 10 publicly traded companies that paid no federal taxes for three years running, despite being profitable in each of those three years, according to an analysis by Standard & Poor's. 

OPPOSING VIEW: Don't cut corporate tax rates.  Welcome to the wacky world of corporate taxes. These days, how much a company pays depends in large part on whether it sees tax avoidance as a line of business. The lunacy of corporate tax rates is not that they are too high, as many business groups argue, or too low, as many liberal groups say, but that the tax code is hopelessly complex and subject to change through lobbying and political contributions.

The fact that some companies pay zero while many others pay close to the full 35% shows how badly broken the code is. It was simplified in 1986 after years of bipartisan effort. But since then, it has grown to the point where it encourages companies to get into certain businesses merely as tax shelters and to view their lobbying arms as profit centers. Which is why President Obama has joined with a number of business leaders and a few lawmakers of each party in calling for a fresh overhaul. The idea, as Obama outlined in his State of the Union address, is to lower the tax rate and make up the cost by closing many of the loopholes that have sprung up.

To overcome Republican anti-tax orthodoxy, any reform almost certainly will have to be revenue-neutral, as was the case with the 1986 reform, which passed despite a widespread perception that it didn't stand a chance. Some Republicans, including House Majority Leader Eric Cantor, of Virginia, are pushing the idea of a temporary tax holiday on corporate profits hoarded overseas to avoid taxes, a rerun of a tactic used in 2004. Periodic tax breaks such as this one might be popular with the U.S. Chamber of Commerce. And they are a good way for lawmakers to raise money. But they add uncertainty and instability to the code, which is contrary to the cause of simplification.

Some liberal groups, meanwhile, are pushing for the elimination of loopholes without the reduction of rates. They point to the dwindling portion of tax revenue that comes from corporate taxes and express moral indignation at companies like GE not paying any taxes.

Corporate tax receipts certainly have dropped. In the 1960s, they accounted for about a quarter of all tax receipts, while amounting to less than 10% now. But the reality is that all taxes are ultimately paid by individuals. The shareholders and owners of companies pay corporate taxes indirectly in form of smaller dividends and depressed stock valuations. Consumers pay through price increases. Rather than turning the debate on corporate taxes into the same tired struggle of the rich against everyone else, it should focus on making U.S. companies more competitive. Those companies now have the choice between paying some of the highest rates in the world or devising tax avoidance schemes, both of which move investment abroad and take their attention away from producing great goods and services. For that reason, the emphasis should be on tax simplification. Debates about social justice can be had on other occasions.

Posted by Kathy Meeh