In a new, mostly ridiculous study, the liberal Institute for Policy Studies (IPS) has inadvertently made a strong case for fundamental tax reform. The paper rails against so-called tax-dodging corporations, some of which pay a negative effective tax rate. In truth, these businesses are often just taking advantage of a broken tax code riddled with special-interest provisions that pick winners and losers in the marketplace. A more honest examination of effective rates would lead to the inevitable conclusion that the tax code is in dire need of comprehensive reform. The current code has created an uneven playing field with wildly disparate effective tax rates for different businesses and industries.
The New York Times documented these variances in a 2013 report that examined effective total corporate rates paid by American companies from 2007 to 2012. The report showed the utility and information technology industries paying relatively low effective rates of 12 percent and 21 percent, respectively, over this period. Meanwhile, the energy and insurance industries paid significantly higher rates of 37 percent and 51 percent, respectively. Even within single economic sectors, effective rates varied tremendously from company to company. Pfizer, for instance, paid a 43 percent rate, while its large pharmaceutical rival Johnson & Johnson paid a rate of less than half that at 21 percent.
On this point, the authors are correct. But to be fair, the same is true on the individual side of the tax code, too, where households across the economic spectrum take advantage of so-called “loopholes.” Millions of middle-income Americans pay average effective income tax rates that are a fraction of the advertised 10 percent or 15 percent statutory levels they’re likely to see on the IRS’s tax-bracket charts, as a Congressional Budget Office paper on the distribution of 2013 federal income taxes illustrates.
Ironically, by highlighting the unnecessary complexity of the code, the authors are making a compelling case for the type of tax reform that Speaker Paul RyanPaul Davis RyanFormer Sen. Bob Dole dies at 98 No time for the timid: The dual threats of progressives and Trump Juan Williams: Pelosi shows her power MORE (R-Wis.), House Ways and Means Chairman Kevin BradyKevin Patrick BradyFive things to know about the November jobs report Economic growth rate slows to 2 percent as delta derails recovery Democratic retirements could make a tough midterm year even worse MORE (R-Texas) and other congressional Republicans are advocating. Indeed, the House GOP tax plan calls for eliminating the vast majority of corporate tax credits and deductions, including the two cited by the IPS study’s authors. That’s one of the fundamental objectives of tax reform: broadening the tax base to create a system that treats businesses more fairly and uniformly. It’s puzzling why anyone concerned about tax avoidance or lack of transparency would oppose such a change.
Additionally, the IPS study notes, “offshore tax sheltering plays a prime role” in lowering effective rates. Certainly, international activities can be a significant factor. The United States maintains a “worldwide” system of taxation that imposes U.S. obligations on top of foreign taxes, unlike most of our industrialized trading partners that have moved to “territorial” systems (in which profits are taxed only by the country where they’re earned). Converting to a territorial system, as House Republicans have proposed, could fix this problem and reduce the “lock out” effect whereby corporations keep profits overseas to avoid multiple layers of taxation. That’s a major reason why President Obama proposed a version of a territorial tax system in 2015. The authors of this paper should consider supporting this change as well, instead of simply railing against corporate America.
Beyond bemoaning corporate tax compliance, the paper attempts to discredit a slew of American businesses with a weak attempt to link low effective rates to executive compensation and layoffs. Indeed the title of the study, “Corporate Tax Cuts Boost CEO Pay, Not Jobs,” suggests that companies are plowing tax savings directly into executive salaries. This is comical. While multimillion-dollar salaries might be an easy target for the anti-corporate crowd, these are typically extremely small expenditures relative to the overall operational budgets of a major corporation.
Take for example, the study’s attempt to call out specific companies like General Electric, AT&T and Exxon Mobil for increasing the pay of their chief executive officers. The study claims GE boosted CEO Jeffrey Immelt’s salary to $18 million in 2016 at the same time the company reduced its workforce by 14,700. The company could have instead zeroed out Immelt’s compensation and distributed his entire salary to these workers, although that would have amounted to a mere $1,224 per displaced employee. There are many reasons why companies reduce their workforces, but using those savings to finance higher CEO pay isn’t a plausible one. There’s simply no credible economic analysis to suggest that tax avoidance is somehow driving higher executive salaries or encouraging companies to lay off workers.
The current tax code imposes a $263 billion burden on the economy each year in compliance costs. Our poor tax policies are distorting economic behavior and incentivizing companies to move their operations overseas. This is a serious problem. By contrast, trying to draw imaginary connections between tax avoidance and executive compensation isn’t a serious exercise. While there will certainly be differences between people on the left and right about the appropriate level of taxation, the need for reform and simplification should enjoy bipartisan consensus.
Brandon Arnold is executive vice president of the National Taxpayers Union, an organization that supports lower taxes and smaller government at all levels. He has testified on fiscal policy before Congress and state legislative committees, and has appeared on networks including C-SPAN and Fox News. Previously, he was director of government affairs at the Cato Institute and a research analyst at the National Republican Senatorial Committee. You can follow him on Twitter @BrandonNTU.
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