New York Times columnist David Leonhardt has an excellent piece out diving into the paradox of the American corporate tax code -- "the worst of all worlds" -- and the supreme difficulty of achieving the kind of reform Obama called for in his State of the Union address last week.
"I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes," Obama said in his address. "A parade of lobbyists has rigged the tax code to benefit particular companies and industries."
The top corporate tax rate in the United States is 35 percent, one of the highest in the world -- but, Leonhardt notes, the code is filled with so many loopholes and credits that few companies pay the top rate. And for this those companies that are paying only 4 or 5 percent, there is little incentive to overhaul the system.
As Leonhardt puts it, "any system that creates as many winners as this one won't be changed easily":
Or, as Jonathan Chait approximates it at The New Republic, "reforming the corporate income tax means transferring money away from companies with lots of political clout toward those with less political clout."
One of the major winners of the current loophole-ridden tax code system is General Electric -- and GE's CEO Jeffrey Immelt was recently appointed to head President Obama's Council on Jobs and Competitiveness, which is expected to suggest changes to the corporate tax code.
How does GE play the game so well? There are a number of routes that companies who pay low corporate tax rates can go, such as spending large sums of money on new equipment, or a company losing money can subtract their losses from initial profits thus avoiding tax payments until they are consistently earning money again. GE, as Leonhardt put it, is simply "expert at avoiding taxes":
When the three accounting professors analyzed more than 2,000 companies, they found big variations in tax rates within almost every subset of companies. Companies in the same industry often paid very different rates, even when they were similar in size.At the Atlantic, Derek Thompson displays some nice graphs (h/t Tax Notes) which track the drastic drop in GE's effective tax rate from approximately 30 percent in the 1990s to extremely low levels today. Thompson notes: "What's good for GE isn't necessarily good for the U.S. Treasury."
G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm's. One common strategy is maximizing the amount of profit that is officially earned in countries with low tax rates.
However, Thompson also adds that Immelt "should be an expert" at suggesting changes to the tax code. Given Immelt's history of blasting the high corporate tax rate, and his company's adept navigation of tax arcana, it may be doubtful that he will be a reform-from-within leader. But Thompson's point still raises the question: is Immelt President Obama's Joseph Kennedy?
Kennedy was appointed by Roosevelt to be the first chairman of the SEC -- despite years of risky behavior on Wall Street. A BusinessWeek article on "Joseph Kennedy's Enduring Example" lays out the relevant historical details:
After becoming the youngest bank president in the country at age 25, Kennedy gained notoriety as a Wall Street speculator throughout the 1920s and early 1930s. In the 1930s, for example, he participated in the Libby-Owens-Ford stock pool, a scheme in which Kennedy and his partners created an artificial scarcity of Libby-Owens-Ford stock to drive up the value of their own portfolios. The pool, and others like it, was investigated by Senate Banking and Currency Committee counsel Ferdinand Pecora, who just a few years later would report to Kennedy as one of the SEC's commissioners. Clearly, Kennedy wasn't an obvious choice for the role of reformer. Indeed, Roosevelt is said to have responded to criticism of his appointment of Kennedy by saying, "It takes a thief to catch one." Yet Kennedy succeeded beyond anyone's imagination in his efforts to create a watchdog for the securities business -- to the surprise of both his Wall Street associates and those who distrusted him. In retrospect, it seems as though Kennedy understood that the SEC represented such a radical idea that it was doomed to fail unless he persuaded a defiant business community to offer a measure of cooperation.
Jeff Sessions: Lower Corporate Tax Rates Even If We Raise Taxes Elsewhere (VIDEO)
http://www.huffingtonpost.com/2011/02/04/sessions-lower-corporate-tax-rates_n_818827.htmlWASHINGTON -- Among the longtime cornerstones of Republican economic policy is the argument that the U.S. corporate tax rate is too high, stagnating growth. This argument is becoming increasingly bipartisan, championed by President Barack Obama's deficit commission and endorsed by Obama himself during this year's State of the Union address.
But deficit hawks still want tax cuts to be "paid for" -- that is, offset by spending cuts elsewhere in the budget -- despite the conservative claim that the increased economic activity encouraged by lower rates will result in a wider pool of taxpayers.
On Friday, Sen. Jeff Sessions (R-Ala.) took to the floor of the upper chamber to call for cuts in corporate tax rates, and announced that he'd be comfortable offsetting the cuts by raising the rates in other places.
"I believe the American people are open to these kinds of ideas," Sessions said. "I think the idea that this is not a popular plan because, 'Whoa, you're talking about cutting taxes on corporations, nobody wants to do, they don't believe [in], that, the American people won't support that.' I think the American people understand we can't tax our corporations more than they are doing in Canada, 34 percent to 16 percent, and expect to win competition for jobs and business. We have got to make some of those changes, even if we have to raise taxes somewhere else, we've got to look at the taxes that are killing jobs and try to make our tax policy further growth and prosperity, not austerity." [emphasis added]
Sessions didn't detail what sort of tradeoffs he would find acceptable, and his office didn't return an email seeking clarification.
But the Alabama Republican's suggestion that taxes be raised elsewhere in order to make corporations more comfortable was too inviting for some Democrats to ignore. The office of Senate Majority Leader Harry Reid (D-Nev.) quickly pounced, posting video of Sessions' speech on its YouTube channel.
"Today," Reid spokesman John Summers wrote in a statement, "Sen. Sessions said he wants to cut taxes for corporations, even if it means raising taxes somewhere else. So, whose taxes would Sen. Sessions raise? Does he think it's time to fund corporate giveaways on the backs of middle-class families?"
UPDATE: Stephen Miller, a spokesman for Sessions on the budget committee, sends over the following response. It's not a direct disavowal of the Senator's floor statement. But it does accuse Reid's office for twisting his words.
But deficit hawks still want tax cuts to be "paid for" -- that is, offset by spending cuts elsewhere in the budget -- despite the conservative claim that the increased economic activity encouraged by lower rates will result in a wider pool of taxpayers.
On Friday, Sen. Jeff Sessions (R-Ala.) took to the floor of the upper chamber to call for cuts in corporate tax rates, and announced that he'd be comfortable offsetting the cuts by raising the rates in other places.
"I believe the American people are open to these kinds of ideas," Sessions said. "I think the idea that this is not a popular plan because, 'Whoa, you're talking about cutting taxes on corporations, nobody wants to do, they don't believe [in], that, the American people won't support that.' I think the American people understand we can't tax our corporations more than they are doing in Canada, 34 percent to 16 percent, and expect to win competition for jobs and business. We have got to make some of those changes, even if we have to raise taxes somewhere else, we've got to look at the taxes that are killing jobs and try to make our tax policy further growth and prosperity, not austerity." [emphasis added]
Sessions didn't detail what sort of tradeoffs he would find acceptable, and his office didn't return an email seeking clarification.
But the Alabama Republican's suggestion that taxes be raised elsewhere in order to make corporations more comfortable was too inviting for some Democrats to ignore. The office of Senate Majority Leader Harry Reid (D-Nev.) quickly pounced, posting video of Sessions' speech on its YouTube channel.
"Today," Reid spokesman John Summers wrote in a statement, "Sen. Sessions said he wants to cut taxes for corporations, even if it means raising taxes somewhere else. So, whose taxes would Sen. Sessions raise? Does he think it's time to fund corporate giveaways on the backs of middle-class families?"
UPDATE: Stephen Miller, a spokesman for Sessions on the budget committee, sends over the following response. It's not a direct disavowal of the Senator's floor statement. But it does accuse Reid's office for twisting his words.
So let me get this straight: Senator Sessions goes to the floor for thirty minutes to explain a variety ways we can create millions of new private sector jobs--without government spending--and Democrat Leadership's apparent priority is to find a way to twist his words to fit into a scripted attack? I'm sure out-of-work Americans consider that a really constructive use of Congressional resources.
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