The Truth About Corporate Taxes

The New York Times report that General Electric paid no federal taxes last year -- for the second year in a row -- rekindled the debate about corporate tax rates. Never mind, for the moment, the fact that GE did pay federal taxes for 2010 -- it paid estimated taxes throughout 2010; it just won't owe much additional tax today. Never mind that much of the tax reductions stemmed from carry-forwards of huge losses incurred during the financial crisis. And never mind that what GE did apparently was lawful.

Fittingly for April 15th, the question is what's the real question about corporate taxes?

Conservatives say U.S. corporate tax rates are too high. They cite data showing that America has the second highest corporate tax rate among OECD nations:


source: NOfP chart based on 2010 OECD data

Conservatives also note the tax on new investment is particularly high--and thus a barrier to economic growth.

Liberals counter that tax rates are meaningless--exceptions and deductions in the tax codes means that few American corporations pay the top rates. Indeed, they say, correctly, that Federal revenues from corporate taxes are far less than from individual taxes--and are lower, as a percentage of GDP, than most other developed countries.

President Obama long has wanted to close supposed corporate tax loopholes--to raise revenues. Conservatives respond that the Treasury Department estimated that more than 60 percent of the corporate tax burden falls on employees via pressure on wages.

So who's right? Both sides. The tax code, including corporate taxes, is riddled with exemptions intended to encourage whatever behavior Congress favored that week. GE, for example, took full advantage of green energy credits that lefties typically like. So, though conservatives are correct that U.S. tax rates are nearly the highest in the world, few acknowledge that the honeycomb of exceptions make the tax code indefensible.

For their part, most liberals fail to recognize the fact that high tax rates encourage U.S. multinationals to move abroad--so raising corporate taxes might both reduce receipts and snowball job loses in America. Plus, the fact is that corporate tax "loopholes" are only a bit over half the size of the deduction for employer-sponsored healthcare that I'm desperate to delete. (At the same time, the U.S. is one of the few jurisdictions that taxes overseas income even when taxed abroad, one of those details that make the true tax situation difficult to judge.)

In sum, most of the back-and-forth about corporate taxes misses the point. Tax rates are too high; there are too many exceptions--though most corporate tax exemptions are not industry-specific.

The solution is neither rate hikes nor tax cuts. It's tax simplification. The system's too complicated. Try a flat tax -- or something close; keeping the home mortgage and charitable individual deductions, and accelerated depreciation for at least some corporate investment. And otherwise, quit using Title 26, U.S. Code, as an ever-expanding depot for the pet promises of politicians.