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In the past year President Bush proposed, and Congress approved, a $1.6 trillion tax cut that reduced rates for most taxpayers and made some significant structural changes, including eliminating the estate tax. Corporate America felt left out when the President rammed his tax cut through Congress. Wheres our tax cut, it asked? Be patient, responded the Bush administration.
As it turns out, corporate America had to wait only a few months for its tax cut. As part of the economic stimulus package passed by Congress in mid-March, businesses were granted accelerated depreciation of new purchases. Depreciation may be an abstraction to most Americans, but the tax break will reduce corporate taxes by $43 billion this year.
Media coverage of the economic stimulus package focused on how the bill had been significantly pared down from the one first offered by House Republicans, which contained hundreds of billions in corporate tax breaks. The mainstream media treated the original measure with surprising disdain, delighting in reporting the billions in refunds the bill would have provided to some of Americas wealthiest corporations. However, once the Senate refused to grant large corporate tax breaks and House Republicans were forced to remove them from the bill, the medias interest in corporate taxes waned. Had they continued to investigate, the media would have discovered that although House Republicans largely failed in their battle to significantly slash corporate taxes (though $43 billion is hardly pocket change), advocates of reduced corporate tax rates have been winning the war for 30 years.
According to the IRS, in 1971, corporations paid 23 percent of income taxes collected by the federal government. By the year 2000, the corporate share of taxes had fallen to 17 percent. This reduction may seem relatively minor unless we appreciate that individual taxpayers were required to fill the gap left by the effective decrease in corporate tax rates. If corporations had paid 23 percent of the income taxes collected in 2000, as they did in 1971, the federal government could have distributed an average rebate of $628 per tax filer at no net loss of revenue.
Corporations are able to avoid paying the 35 percent tax on profits called for under the law by taking advantage of thousands of loopholes. According to a study conducted by the Institute on Taxation and Economic Policy, 250 of Americas largest corporations paid an average tax rate of 20.1 percent in 1998. Many of these corporations, including Texaco, Enron, and Goodyear actually received rebates from the federal government. Indeed, one of the most striking aspects of corporate taxes is the disparate treatment received by different industries. While some industries, such as publishing and health care, pay close to the standard 35 percent rate on profits, the petroleum and forest products industries pay only 10-15 percent of their profits in taxes.
Congress, eager to appease corporate contributors, has largely ignored the issue of corporate tax avoidance. However, in the wake of the Enron scandal, a bill has been introduced in the Senate that would limit the ability of corporations to reduce their tax liability by granting employee stock options. Currently, corporations count stock options as expenses for tax purposes, thereby reducing their taxes, but often fail to include the value of options granted when reporting profits. Corporations are thus able to overstate profits, driving up their stock price, all the while limiting their tax liability.
Corporate America has banded together to fight for continued preferential tax treatment of stock options. Given corporate opposition and a House of Representatives that showered corporate America with billions in tax rebates, tax treatment of options isnt likely to change anytime soon. However, its worth bearing in mind that options represent only one of numerous tax loopholes corporations can exploit to reduce their tax burden. Instead of focusing on options, Congress could adopt a more comprehensive approach that would establish a true mandatory minimum tax rate that corporations would have to pay under all circumstances.
Specifically, Congress should strengthen the Alternative Minimum Tax (AMT) on corporations. Congress established the AMT in the 1986 Tax Reform Act to ensure that profitable corporations pay at least some federal income tax. The share of income taxes paid by corporations increased after 1986. However, laws passed in the 1990s weakened the AMT, resulting in lower effective corporate tax rates. The AMT has been eviscerated to the point where many large corporations routinely receive tax rebates from the federal government.
Congress should require that corporations pay at least 20 percent of their profits in taxes. This would effectively limit the extent to which corporations could take advantage of deductions, thereby restoring a measure of fairness to a system which favors some industries over others and corporations over individual taxpayers.
In the buildup to April 15, mainstream newspapers often publish a stream of articles related to federal taxes. This year, many of those articles focused on the fact that the IRS audits low-income Americans, specifically those who receive the Earned Income Tax Credit, much more frequently than it does wealthy Americans.
Citizens should insist that Congress address the more fundamental issue of corporate tax avoidance. Creating an enforceable minimum corporate tax rate of 20 percent of profits would generate tens of billions of dollars for the U.S. Treasury. Doing so would send a signal to corporate America that playing by the rules involves more than just reforming accounting practices. Z