Ever notice that any attempt—any attempt at all—to restrain corporate actions in any way—any way at all—immediately produces a spate of articles and studies showing that the attempt is outrageous (or destructively expensive or costing jobs or putting the US at a disadvantage or contrary to the universal desires of God and nature)? Take corporate taxes (I wish the government would take some).
Everybody knows the country’s corporate tax burden is too high, right? And that its corporate tax rate needs to be cut just to give us a fighting chance against those foreign companies that pay practically no taxes at all, right? You hear this stuff all day on Fox News, you hear it almost every day from the mainstream media, and you can build a paper castle out of all the right-leaning think tank reports on the subject. In fact, John McCain's web site discussion of his stimulus plan says:Economic Stimulus PlanBut…..Cut The Corporate Tax Rate From 35 To 25 Percent.
A lower corporate tax rate is essential to U.S. competitiveness. America was once a low-tax business environment, but as our trade partners lowered their rates, America failed to keep pace, leaving us with the second-highest rate among the world’s advanced economies.[1]
Cutting the corporate tax will expand the U.S. economy, creating jobs and opportunities for prosperity. A recent analysis of tax policy options estimated that a cut less than half this size could increase long-term growth by 0.5 percent, or $100 billion in a single year.[2]
Lower corporate taxes leads to higher wages. Recent studies have shown that corporate taxes are in large part passed on to labor through lower wages. One study noted that a one percent hike in the corporate tax results in a 0.8 percent decrease in manufacturing wages.[3] Accordingly, cutting corporate taxes can increase wages for American workers.
Neal Cavuto & Glenn Beck notwithstanding, and despite Cato’s attempt to scare the world with chants that U.S. Has Fourth Highest Corporate Tax Rate. the GAO just issued a report on corporate taxes showing that 72% of all foreign controlled corporations operating in the US, and some 57% of US controlled corporations operating here paid no federal income taxes for at least one year between 1998 and 2005. And around half of all corporations operating here paid no taxes for two or more of those years.
The report unfortunately names no corporations and made no attempt to determine whether the reasons that the corporations paid no taxes were legitimate. But this isn’t the first study to find these results. Back in 2004, the GAO found that:
showed that 61 percent of US corporations paid no federal income taxes from 1996 through 2000, a period of rapid economic growth and rising corporate profits.Say, maybe the right question isn’t “what is the official corporate tax rate,” but “what is the effective rate actually paid?” Needless to say, I’m sure that McCain (or more likely his economic advisers), Cavuto, Beck, and even good old Cato are aware that many corporations often pay no taxes at all. Do they just forget to tell people that when they’re beating the “lower the tax rate” drums? Have these solid citizens with their abiding concern for the health of artifcial entities at the expense of living and breathing ones actually know what the effective corporate tax rate is? Does anyone?
But don’t get your hopes up. The 2004 report didn’t really get the public all that angry. And I suspect the same reaction to the 2008 report, as well as the same explanation from the business folks about why “this is nothing to get upset about.” As reported back in 2004, the explanation from the business folks, like said Gary Hufbauer, senior fellow at the Institute for International Economics, was that "When you get a report like this people think, gee, they're getting away with murder. But most of the murder they're getting away with was deliberately designed by legislatures in response to competitive concerns. This is the result."
It is, indeed, the result. And a pretty good reason to reexamine the policies that produced that result. Which should be done honestly, openly, and in good faith. Meaning that McCain, Cavuto, Beck, Cato, et. al. should have no part in the reexamination.
In closing, I point out that the focus of the GAO study was whether there was a difference between foreign-controlled companies here and US-controlled companies here, and the answer was largely yes, there is. Foreign corps tended to be even more likely than US corps to pay no taxes (though there were a lot in both categories). Another real good question raised by the study is whether corporations are abusing the hell out of the tax systems by manipulating the price that one subsidiary charges another subsidiary along the production and distribution chain. It’s awfully simple for a subsidiary in a low tax country to sell a $1 item for $50 to a subsidiary in a high tax country. The sub in the low tax nation shows a huge profit but pays little tax, while the sub in the high tax country shows little profit and pays little tax.
I’d bet my life that this abuse of transactions between affiliated companies (a practice that has long been used to avoid profit constraints imposed on regulated utilities) is a major reason that drug companies tend to show more profits for their foreign operations than they show for their US operations.
Ain’t business grand? Ani't business ethics the cutest little oxymoron you ever saw?
