Why taxing corporate America is so hard to do
The tax burden on US corporations has fallen since the last major tax overhaul in 1986. Simply, it's a deal too good to give up.
The U.S. system for taxing corporate profits is outdated, ineffective at raising revenue, and creates perverse incentives for companies to shelter profits overseas.
It is also, for most U.S. companies most of the time, a pretty good deal, which is one of the big reasons why any serious overhaul will be so difficult to achieve.
The quick opposition that greeted the ambitious reform plan released a month ago by Republican Ways & Means Committee chairman Dave Camp, who last week announced he would retire from Congress, was chalked up to the usual array of special interests. But the broader problem is that U.S. companies, particularly those that compete in international markets, have adapted remarkably well to the current tax system.
Indeed, the tax burden on U.S. corporations has fallen over the three decades since the last major tax overhaul, in 1986, even as corporate profits have been rising to record levels.
This is contrary to most of what we hear in the tax debate. Much of the attention is on the U.S. statutory tax rate, which at 39 percent combined federal and state average, is now the highest in the advanced industrial world. Most other countries have been aggressively lowering their statutory rates in an effort to attract investments.
But 39 percent is a highly misleading number. The average U.S. corporation actually pays roughly 27 percent, on par with what other corporations pay in similarly sized advanced economies, and this effective rate has been steadily declining since the 1980s. Part of the reason is that Congress has sweetened corporate tax breaks for specific industries, including deductions or credits for domestic production, capital investments, and research and development.
The biggest reason most U.S. companies are not disadvantaged is the way in which the U.S. taxes -- or mostly does not tax -- the overseas earnings of its corporations. Foreign profits now account for more than 20 percent of total U.S. corporate profits -- double the figure of two decades ago, and that percentage is much higher for big multinationals that drive the debate over corporate tax.
In practice, U.S. corporations rarely pay much in U.S. taxes on foreign profits because they receive credit for taxes paid to foreign governments, and are allowed to avoid any U.S. tax payments as long as those profits are retained abroad. Companies are also increasingly adept at sheltering profits in tax havens that collect little or no tax on corporate profits.
The best available estimate suggests U.S. corporations face an effective tax rate (including all foreign and U.S. taxes) of just 15.7 percent on foreign profits. Of that, the U.S. Treasury actually collects only 3.3 percent, since most profits are never repatriated. U.S. companies are currently holding about $2 trillion offshore, in large part to avoid tax liabilities.
U.S.-based companies often complain that the U.S. system, which in theory requires companies to pay taxes on their profits "worldwide," is a big competitive disadvantage. Most European countries have a "territorial" tax system, which taxes only domestically earned profits. But according to one study that calculated the global tax burden of the largest 200 European- and U.S.-based multinational corporations, U.S. corporations on average faced similar or lower effective tax rates than their European counterparts, though it varied by industry sector .
There are big problems in the corporate tax system, to be sure. Companies pay highly uneven effective tax rates depending on whether they qualify for tax breaks; research-intensive multinational companies like General Electric (GE), for example, usually face tax rates in the single digits, while retailers like Target (TGT) that depend on domestic sales pay close to the statutory rate.
Companies with intangible assets like patents and trademarks, such as Apple (AAPL) or Pfizer (PFE), are more easily able to book profits in tax haven countries like Bermuda or Ireland. The largest tax havens account for 24 percent of reported foreign profits by U.S. multinationals, even though they represent just 1 percent of the global economy.
Deferral on foreign profits also creates incentives for companies to keep those profits offshore rather than re-invest them in the U.S., which is generating pressure in Congress for another "tax holiday" to encourage repatriation. Research suggests that deferral encourages corporations to invest more abroad than they otherwise would, though the effect is small. Other factors like lower wages, proximity to fast-growing markets, and government investment incentives matter much more for corporate investment decisions. Still, no country wants a tax system that in any way encourages foreign over domestic investments.
The prospects for a corporate tax reform that lowers the statutory rate and addresses some of these problems would seem brighter than they have in years. Both Republicans and Democrats have now developed comprehensive proposals that lay out the arithmetic for adopting different trade-off options in any agreement. But unfortunately the arithmetic may show that, for all their complaints, most U.S. companies -- and particularly those competing in foreign markets -- are doing pretty well under the current system. That is probably not a recipe for change.
Edward Alden is a senior fellow specializing in U.S. economic competitiveness at the Council on Foreign Relations. Rebecca Strauss is associate director of CFR's Renewing America publications series. This article draws on research for the CFR report "Standard Deductions: U.S. Corporate Tax Policy."
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OK, one more time on Econ 101:
Corporations don't pay taxes! To a business, taxes are just another cost of operation that has to be passed on in the prices of their products. So consumers pay those taxes.
What's worse, if you tax your in-country businesses enough, foreign companies will be able to sell at lower prices and undercut domestic companies and jobs. You'd be better off replacing corporate taxes with a sales tax that hits all products evenly, but people and their politicians are too stupid for this.
Idiots, corporations don't pay any taxes, their customers do, most of the time that is you and I!
You can't stop a person or a company from starting a business in another country and you can't tell that other country to pay the US for work done by people in another country. The US doesn't pay other country's for work done here in the US.
We are a one world economy, like it or not, it's here to stay. We better figure out a way to compete in niche markets we can control and win. The biggest issue of offshore services is not price as much as quality of service. In certain markets, people in other countries often work harder and with more passion, higher quality and more productivity.
More regulations on businesses here in the states - the new ACA taxes hitting businesses in 2015 and other issues will continue to destroy US labor markets and their ability to compete with other countries.
GE paid how much tax this year? Was it more than zero this time?
Look at policies of Obamanomics... It goes after a few trespassing Nevada Cows with helicopters, 200+ heavily armed government thugs, all the while ignoring thousands of illegals crossing the border. I have to wonder if the cows voted democrat if they would even bother?
How about we redeploy these BLM thugs to the border and give them 'shoot to kill' orders and $500 bounty on every dead one illegal if the border problem would continue.
I guess when the government can create deem certain areas as "1st Amendment Zones", implying that in the rest of the country the "1st Amendment" is null and void, we are through.
Under democrats, it's clear that Cows have more rights than people...
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