Citizens for Tax Justice (CTJ) — a left-leaning public policy think tank and advocacy group — is out with a new report called “The Sorry State of Corporate Taxes” that is one part analysis and one part attack ad. CTJ examined 288 major U.S. businesses between 2008 and 2013 and concluded that 26 of them “enjoyed negative income tax rates,” and that 111 of them had a negative federal income tax rate in at least one year in the five-year period. CTJ calculated that the “total amount of federal income tax subsidies enjoyed by the 288 profitable corporations over the five years was $362 billion,” and highlighted companies like The Boeing Company (NYSE:BA), General Electric Company (NYSE:GE), and Verizon Communications Inc. (NYSE:VZ) as examples.
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If the conclusions are accurate, then the report could be damning. America’s tax code is a labyrinthine monster, a common enemy that both Democratic and Republican lawmakers would like to change or overhaul, if possible. Most people believe the tax system is unfair — a CNN/ORC poll conducted in 2012 put the percentage at 68 percent in 2012 — and everyone thinks it’s too complicated. From Main Street’s point of view, the tax system has been perverted for the enjoyment of special interest. From the point of view of special interest groups, the tax system is a handicap in a global, competitive market.
But policy changes are hard. Democrats and Republicans idealize different tax systems and without the willpower to compromise every change to the tax code is either pushed through on partisan lines or conceded to under duress. The result is a Frankenstein patchwork that is not effective, not efficient, and that can be gamed by those with the means. CTJ argues that this is exactly what major U.S. corporations are doing.
Some of the corporations in question have already spoken back, questioning CTJ’s report. A spokesperson for General Electric told Reuters that, “CTJ inaccurately uses the current tax provision — a book accounting number — to make definitive statements about our U.S. income taxes. This is not the same as the cash income tax that we pay for a given year.” Spokespeople for Boeing and Verizon said they complied with all tax laws.
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It’s possible, though, that corporations are obeying the letter of the law but violating its spirit. This is the gamesmanship that the complexity and patchwork nature of the tax code allows, and its the same gamesmanship that led to the creation of the alternative minimum tax. If anything, corporates have only been getting better at this game. Among other things, the White House Office of Management and Budget reports on sources of federal revenue, and their data show that since 1950, the share of total government receipts accounted for by the corporate income tax has decreased. Meanwhile, payroll taxes, which are split with individuals, have grown enormously, and the share accounted for by the individual income tax has stayed relatively flat.
In 2012, 46 percent of federal revenue came from the individual income tax, 35 percent from payroll tax, 10 percent from corporate income tax, and 9 percent from excise, estate, and other taxes.
In December, the Senate’s chief tax writer unveiled a series of proposals aimed at lowering the 35 percent tax on corporate profits by removing special-interest tax breaks. According to a copy of the proposals seen by the Washington Post, proposal drafts from Senate Finance Committee Chairman Max Baucus (D-Mont.) would end the practice of indefinitely deferring U.S. taxes on foreign earnings, impose an immediate 20 percent tax on about $2 trillion in overseas profits, and diminish a business’ ability to quickly deduct certain expenses, such as advertising. These changes would help lower the 35 percent corporate tax rate without the U.S. Treasury being impacted to a level below 30 percent. Some Republican lawmakers are looking for a rate of 25 percent.
CTJ argues that policymakers should repeal the rule that allows corporations to do this. “This reform would effectively remove the tax incentive to shift profits and jobs overseas,” CTJ argues.