Corporate tax revenues have dropped dramatically over the last two generations, feeding concerns among tax analysts about the recent rash of corporate “inversions.”
Corporations paid around a third of all U.S. revenues in the early 1950s, a figure that’s dropped to around 10 percent in recent years due to a host of factors.
The offshore tax deals that allow corporations to reincorporate abroad — and have drawn the ire of President Obama in recent weeks — play a relatively small role in the dwindling corporate tax base. But experts say the attention given to inversions illustrates the broader problem facing the corporate tax system.
“Given the importance of corporations to the economy, and given their recent profit levels, the extent to which they actually contribute is below what they can and should,” said Reuven Avi-Yonah, a professor at the University of Michigan Law School.
There’s a variety of reasons for the decline in the corporate taxes, which amounted for roughly 1.6 percent of gross domestic product in 2013, according to the Urban-Brookings Tax Policy Center, down from 5.9 percent in 1952.
Many former corporations have chosen to instead pay taxes through the individual system by reorganizing as S corporations or partnerships, a step that simplifies their tax treatment, but still allows revenue to flow to the Treasury.
But at the same time, many U.S. multinational corporations also pay far less than the statutory corporate rate of 35 percent — including some with ties to Obama’s White House, like General Electric.
The U.S. is one of the few industrialized countries that still taxes a corporation’s worldwide income, giving multinationals incentive to keep more than $1 trillion in earnings offshore.
Grassroots liberal groups have long taken an issue with the low effective tax rates of corporations like GE, and Democrats are no longer afraid of a “tax the rich” message after Obama’s victories in 2008 and 2012.
“It’s total hypocrisy,” said Frank Clemente of Americans for Tax Fairness. “These are not Main Street businesses paying a 35 percent rate.”
Democrats are now pointing to the offshore tax deals as they employ a populist economic message months before the midterm elections. Even with his friends in corporate boardrooms, Obama has adopted a more strident tone in recent weeks, calling companies that want to move offshore “corporate deserters.”
Republicans believe the Democrats’ specific concerns about inversions are all about politics. But there’s also bipartisan concern about the dwindling corporate tax base, and the use of tax maneuvers — with names like earnings stripping and transfer pricing — that essentially allow multinationals to slash taxes by shifting assets between high-tax and low-tax countries.
Sen. Carl LevinCarl Milton LevinOvernight Defense: First group of Afghan evacuees arrives in Virginia | Biden signs Capitol security funding bill, reimbursing Guard | Pentagon raises health protection level weeks after lowering it Biden pays tribute to late Sen. Levin: 'Embodied the best of who we are' Former Colorado Gov. Richard Lamm dead at 85 MORE (D-Mich.), one of the key Democrats pushing for anti-inversion legislation, has taken a string of high-profile corporations like Apple, Caterpillar and Microsoft to task for their tax tactics.
He argues, along with other Democrats, that companies that use those legal tactics are also depriving the U.S. of revenue that could otherwise go to roads, the education system and other products relied upon by their business.
“While those billions of dollars in tax revenue disappear, the corporate freeloaders multiply, taking advantage of America’s greatness while refusing to pay their fair share,” Levin said at a recent hearing.
House Ways and Means Committee Chairman Dave Camp (R-Mich.) made strengthening the tax base a priority in his 2011 discussion draft on international tax rules.
But Camp has also said he doesn’t blame companies for utilizing legal tactics to lower their tax bill, and that it’s Washington’s fault for allowing the tax code to get out of control. Like with inversions, Camp has said the best way to deal with the broader corporate tax issues is with a broad overhaul of the code.
Other conservatives aren’t that worried about inversions or the corporate tax base.
The Joint Committee on Taxation projects that a House Democratic bill to curb inversions would raise just under $20 billion over a decade.
Democrats are essentially seeking to force corporations to merge with an equal-sized or larger foreign business to reincorporate abroad, and liberals like Clemente believe the JCT projection undershoots the bill’s potential.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office, noted that $2 billion a year represented just a small slice of what the federal government brings in a year. The government hauled in $211 billion in revenue just for July, the Treasury Department said Tuesday.
“Why was the ‘Buffett Rule’ a huge topic of conversation? It was a tiny amount of money targeted at rich people, which had good populist politics in election years,” said Holtz-Eakin, referring to the Democratic push to ensure that wealthy individuals like the investor Warren Buffett paid more in taxes than their secretaries.
“This is the exact same thing, except applied to corporations,” said Holtz-Eakin, now head of the center-right American Action Forum.
Scott Hodge of The Tax Foundation, which promotes free market tax policies, added that he thought the broader concerns about international tax maneuvers were overblown, noting that foreign subsidiaries in the U.S. pay a higher than average effective tax rate.
“I think this is hysteria at its worst right now,” Hodge said, later adding: “There’s speculation, there’s handwringing and there’s worry. But as yet, no one’s put some really good figures on the amount of base erosion.”
Camp, along with other Republicans, wants to essentially shield most offshore corporate income from U.S. taxation, moving America to a so-called territorial tax system. Obama, on the other hand, has called for a minimum tax on offshore income.
Those ideas might seem incompatible at first glance, but analysts like Avi-Yonah say the proposals have plenty in common.
Even so, Democrats and Republicans remain deeply divided about how to proceed with tax reform, and even fellow GOP lawmakers responded coolly to Camp’s broader tax reform ideas.
That means the current international rules are unlikely to be changed soon, even as analysts across the political spectrum believe they offer perverse incentives. Apple, for instance, borrowed billions of dollars in 2013 to pay out dividends to shareholders, choosing to leave its offshore income alone and untaxed.
“There’s a general agreement that when we do reform the corporate system, we need to do it in a way that doesn’t retain the international issues that we have now,” said Roberton Williams of the Tax Policy Center. “Borrowing $30 billion — that’s a dumb situation.”