The Corporate Tax Game
Republicans and Democrats in Washington rarely agree on anything these days. But in recent months almost everyone seems to have coalesced around the notion that the corporate tax system is broken and needs to be fixed.
President Obama is for it. So are the two leaders of the tax-writing committees in Congress: the House Ways and Means chairman, Dave Camp, a Republican, and Max Baucus, the Democratic chairman of the Senate Finance Committee, who plans to retire next year and may be seeking a capstone for his career. The country's biggest companies have declared loudly that they are in favor of revising the nation's business tax system, too.
Despite the widespread support, the campaign for an overhaul is exposing deep fault lines within the business world that suggest it may fall apart. The problem is how to pay for everything lawmakers and businesses want without adding to the deficit.
The main goal of the advocates on both sides of the aisle is to lower the official corporate top rate from 35 percent, the highest among industrialized nations. Republican leaders and a large number of giant companies also want to end what they regard as the noxious practice of taxing the profits that multinational corporations earn abroad. The United States is one of the few countries to do so.
The only way to tackle such goals without losing revenue, however, is to close specific corporate tax preferences intended to promote various activities considered worthwhile by their supporters. There is plenty of money to be found: a Government Accountability Office study in March estimated the 80 or so business tax exemptions added up to about $181 billion in 2011, roughly the same size as total corporate tax revenue.
Yet each of these corporate tax breaks is worth a fortune to the industries they benefit—and fierce campaigning is under way, employing teams of lobbyists in Washington, to keep them in place.
"It is going to be practically impossible to get the rate down," said Howard Gleckman, a fellow at the nonpartisan Tax Policy Center. "No one wants to cut their preferences."
Since the last reduction in United States corporate tax rates, in 1986, other nations have reduced their own business rates; corporations complain this is putting them at a sharp competitive disadvantage. In reality, though, few companies pay the official rate.
Many pay at a much lower effective rate, taking advantage of numerous tax breaks and loopholes and using aggressive tax strategies to shift profits to more generous tax territories abroad. Among the companies benefiting from lower effective rates is General Electric, which has paid total corporate taxes—federal, state, local and foreign—equal to 17.9 percent of its cumulative $81 billion in earnings over the last five years, according to an analysis by S&P Capital IQ.
FedEx paid 20.1 percent, Amazon.com 6.6 percent and Ford Motor 4.2 percent. G.E. said its tax rate was unusually low over this period because it had big losses during the financial crisis. FedEx said it took advantage of temporary incentives to make new investments.
Congress, under relentless pressure from business interests, has allowed corporate taxes to dwindle as a source of revenue. In 2012, they amounted to about 1.6 percent of gross domestic product, half the level collected in 1970. By comparison, the individual income tax generated 7.3 percent of G.D.P. last year.
Many industrialized countries collect more than that percentage, although they, too, have to contend with a competitive globalized world where multinational companies can shift profits beyond the reach of local tax authorities.
"Income is increasingly difficult to nail down," said Aswath Damodaran, a finance professor at New York University. "It is like nailing jelly to the wall. And the problem is only going to get worse rather than better."
The two biggest corporate tax breaks are for accelerated depreciation of machinery and equipment, which saved corporations an estimated $76 billion in 2011, and deferral of foreign source income.
Deferral allows big multinational corporations to postpone paying United States taxes on foreign earnings until they bring those profits home. It saved them $41 billion in 2011. American corporations had amassed about $1.7 trillion in offshore profits by last year, analysts at JPMorgan Chase estimated, a figure that is now believed to be almost $2 trillion.
Mr. Obama wants to claw some of this back by imposing a minimum tax on foreign earnings.