How Big Business Gets a Free Ride by Lobbying to Raise Your Taxes
How can we reconcile the simple fact that Americans are living in one of the least taxed countries in the developed world with the reality that many working people feel they're being “taxed to death”?
Well, consider this: in the 1940s, corporations paid 43 percent of all the federal income taxes collected in this country. In the 1950s, they picked up the tab for 39 percent. But by the time the 1990s rolled around, corporations were paying just 18.9 percent of federal income taxes, and they forked over the same figure in the first decade of this century. We – working people – paid the difference.
That's because the share of our economy represented by government spending has varied by only a small margin since the 1950s, regardless of which party held Congress or the White House. With a pretty consistent picture on the spending side, every time corporate America lobbies for another tax break or loophole for the benefit of their shareholders, they are effectively raising taxes on American households – on the 90-plus percent of the population who get most of their income from wages rather than investments.
The shift of all these taxes from corporations to individuals and families has been pushed with the help of a Big Lie – growing from a small kernel of truth – told by corporate America, its lackeys in Congress and the media it dominates just about every day: that American companies face some of the highest taxes in the world.
The kernel of truth is that, at 35 percent, we do have one of the highest statutory corporate rates in the world – that is, the rate that's written down in the tax code. But what's written in the tax code is inconsequential compared to the number written on checks sent to the IRS.
What US companies actually pay in taxes is among the lowest figures in the developed world. The effective tax rate is what companies actually fork over. As the non-partisan Center for Budget and Policy Priorities (CBPP) explained, the 35 percent rate the corporate mouthpieces on CNBC are always whining about “does not take into account the generous depreciation rules, exemptions, deductions, and credits (some of which are sometimes termed 'loopholes') that corporations may be eligible for.”
Studies of some of the biggest companies have shown their effective tax rates to be, on average, less than half of what's on the books. But also keep this in mind the next time you hear some corporate flack talking about the burden of taxes on “small businesses.” In most countries, there's one corporate tax rate, but in the US, the rates depend on how much a company earns, and, according to CBPP, “in terms of numbers, most U.S. corporations face a statutory rate lower than the 35 percent top rate.”
Take all of this together, and the U.S. ranked 28th out of 30 countries in the Organization for Economic Cooperation and Development (OECD) (which includes most of the world’s leading economies) in terms of the share of the economy corporations pay in income taxes. At 1.8 percent, our government actually collects around half of the OECD average (PDF).
Now ask yourself how many times you've encountered some talking head on a cable news show blathering on about how we need to cut taxes on corporations or they'll move jobs overseas. And then consider this: between 1999 and 2008, while corporations paid about half of the OECD average on their profits, U.S.-based multinationals jettisoned a net total of 1.9 million workers here at home while creating 2.3 million net jobs overseas.
Why Paul Ryan Doesn't Want to Talk About Tax Cuts for Big Oil
Laying the groundwork for the release of his draconian budget proposal this week – it will reportedly cut $4 trillion in spending over the next decade by killing Medicare and other popular programs, and still raises taxes on most Americans in order to pay for more tax cuts for the wealthy – Rep. Paul Ryan, R-Wisconsin, dodged questions about whether he would consider closing tax loopholes for Big Oil in order to reduce the deficit. “We don’t have a tax problem,” he told Fox News' Chris Wallace. “The problem with our deficit is not because Americans are taxed too little. The problem with our deficit is because Washington spends too much money.”
Note how adroitly Ryan changed the topic from closing tax loopholes for large corporations – two-thirds of which pay no income taxes – to taxing “Americans.”
Let's also fact-check Ryan's claims. Last year, the federal government generated less tax revenue (as a share of the economy) then it has in any year since 1950. The 15 percent it collected last year was 3.1 percentage points lower than what we averaged during the presidency of the right's sainted Ronald Reagan.
Among wealthy states, the U.S. is considered to be a low-tax country, and a low-public-spending country. Using OECD data, Sabina Dewan and Michael Ettlinger showed that between 2004 and 2007, the U.S. ranked 24th out of 26 countries in the OECD in overall government spending as a share of our economic output. Our government's spending came in about 7 percentage points below the OECD average -- and almost 20 percentage points beneath that of big spenders like France. (The share's a bit higher now only because of the crash precipitated by Wall Street.)
(That doesn't tell the whole story, however. In the “core” European countries, they pay an average of around 10 percent of their economic output more than we do in taxes, but they get free health care, deeply subsidized education and a better retirement plan for their money. We may get whatever pride that comes with having the biggest military in the world and being a superpower, but we have to pay more for those other things out-of-pocket.)
More importantly, Ryan conflating the tax loopholes enjoyed by big corporations with the taxes “Americans” pay is a classic bait-and-switch. The question of how much taxes “we,” as a nation, pay obscures the much more important issue of who pays what.
Ryan was wise to refocus the discussion away from the generous tax breaks – and subsidies – enjoyed by energy companies. They'll get almost $20 billion in “industry-specific” tax breaks over the next five years, according to the Office of Management and Budget.
That's almost double the $10.5 billion we'll give to the insurance industry over that time. But that only scratches the surface. Energy companies also get a variety of subsidies, both direct and indirect, that distort the market dramatically. In 1998, back when gas was selling for around a dollar a gallon, the International Center for Technology Assessment tried to add up all the “hidden” costs of a gallon of gas – costs that are picked up by taxpayers rather than consumers – and figure out what a gallon of gas really costs. They came up with a figure of between $5-$15 per gallon (PDF).
But “industry-specific” breaks just scratch the surface – about 90 percent of the corporate loopholes and giveaways in our tax code are available to companies across multiple sectors. The total in (narrowly defined) corporate tax breaks is expected to come to $661 billion over the next five years, a figure equivalent to almost one-fifth of the projected budget deficit over that period.
And even that only tells part of the story. As journalist David Cay Johnston pointed out, in 1983 “just 10 percent of America's corporate profits were funneled through places that charge little or no corporate income tax; today more than 25 percent of profits go through tax havens.” It's just one example of hundreds of perfectly legal tax-cheats by the corporate elite that Johnston dissects in his excellent book, Perfectly Legal.
Last week, the New York Times gave us some insight into how this works in the context of its story of how GE is not only avoiding corporate income taxes this year, but is taking a “tax benefit” of $3 billion. According to the Times, GE, which had global profits of $14 billion ($5.1 billion of which was earned in the U.S.), “has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.”
Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the IRS and virtually all the tax-writing committees in Congress.
GE is obviously not alone. The upshot of all this is that while the American economy has many problems, overtaxing corporations is not one of them. In fact, as far as the working American taxpayers who end up picking up the difference are concerned, corporate under-taxation just results in more economic pain.