The Case for a Corporate Tax Cut Doesn’t Hold Up

Far from being a “double tax,” our current Swiss cheese tax system hardly amounts to even a single layer of tax on corporate profits.
Robert McIntyreJuly 13, 2016

The corporate income tax is once again under attack. Republican presidential candidate Donald Trump proposes to cut the corporate tax rate by more than half, from 35% to 15%, while Libertarian candidate Gary Johnson would repeal the tax entirely. Both argue that the corporate tax makes the United States uncompetitive internationally and amounts to “double taxation.”

Robert McIntyre

Robert McIntyre

But neither of these arguments holds water. Citizens for Tax Justice’s analyses of annual corporate filings have repeatedly found that the biggest and most profitable U.S. corporations are sheltering roughly half of their profits from tax, and when these profits are distributed as dividends, about two-thirds are paid to tax-exempt entities. And what remains is taxed at special low rates. This means that, far from being a “double tax,” our current Swiss-cheese tax system hardly amounts to even a single layer of tax on corporate profits.

The “competitiveness” argument is bunk as well. Our corporate tax collections as a share of our economy are among the lowest in the world. The recent wave of corporate inversions has been driven by the unethical pursuit of low or non-existent tax rates in places such as Bermuda and the Cayman Islands. As long as tax loopholes make it possible for these companies to pretend they’re doing business in beach-island tax havens, it won’t matter whether our corporate tax rate is 35% or 3%. A zero tax rate will always be more attractive to corporations seeking to avoid paying U.S. taxes.

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To be sure, the U.S. corporate tax must be reformed. Tax avoidance is rampant: Some of the biggest, most profitable multinational corporations routinely find ways to zero out their income taxes. Sometimes they do it by claiming tax breaks that their well-heeled lobbyists have convinced Congress to enact. But just as often, they do it by creating complex tax-avoidance schemes that push, and sometimes blow right through, the boundaries of the law.

But these problems are fixable. Corporations are pretending that billions of dollars in U.S. profits are being earned in foreign tax havens because the law allows them (and even encourages them) to do so. As long as U.S. companies technically keep their untaxed cash offshore, they don’t have to pay any U.S. tax on it. Ending the “indefinite deferral” rule that lets these companies dodge billions in taxes could end this charade tomorrow.

As for all those “perfectly legal” tax breaks that a pliable Congress has enacted at the behest of corporate lobbyists, a Congress that cares about tax fairness could repeal them tomorrow as well.

Apart from the fact that it’s based on false premises, the argument for corporate tax repeal ignores a number of problems. For one thing, repealing the corporate tax would create a loophole you could drive a truck through. Anyone who currently earns business income reported on individual tax forms would suddenly discover that they could call themselves a corporation and zero out their income taxes.

An even bigger problem with eliminating the corporate income tax is how to make up for the lost revenue. The inevitable answer is that the rest of us will pay more. Cutting or even repealing the corporate tax would be the easy part of corporate tax reform. But tax-cutting aficionados universally flub their lines when it comes to the hard part: how to pay for their tax cuts. In all likelihood, the enormous budget hole created by slashing or repealing the corporate tax would eventually lead to middle-class tax hikes and dramatic cuts in vital public programs like Social Security, transportation funding, and health care.

In the last few years, more so than any other time in the last generation, policy makers and the American public are talking about the widening chasm between the very rich and the rest of us. Cutting the corporate tax is the antithesis of addressing this problem, as the corporate tax is a progressive tax that mostly falls on the best-off Americans (who own most of the corporate shares). The decline of the corporate tax over the past decades is one of the major causes of excessive income inequality.

Instead of gutting the corporate income tax, it should be strengthened substantially. Otherwise, many of the problems we face today — including crumbling infrastructure and big budget deficits — will grow even worse.

Robert McIntyre is the director of Citizens for Tax Justice.