Friday, March 11, 2011

Bob McIntyre's $365 billion testimony to U.S. Senate Budget Committee

For students of the great U.S. corporate tax reform of 1986 under Ronald Reagan, the best account is probably Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform, by Jeffrey H. Birnbaum and Alan S. Murray. It's a subject of current interest, given that President Obama is considering tax reform proposals. The authors of Gucci Gulch highlight one individual in particular for his influence in that historical episode:
"A little-known public-interest lawyer named Robert McIntyre . . sitting at his computer in a cluttered little office in Washington, the scruffy McIntyre spent endless hours combing through the annual reports of the largest corporations in America. . . his result: 128 out of 250 large and profitable companies paid no federal income taxes in at least one year between 1981 and 1983."
. . .
He did not dine at plush, expense-account restaurants, nor did he spend much time buttonholing members of Congress. His $38,000 salary was a mere fraction of the much larger sums earned by his corporate lobbying foes. No matter. In the tax debates ahead, Bob McIntyre's one-man report would turn out to be more influential than all the firepower the corporate lobbyists could muster."
Well, McIntyre, who heads the highly regarded Citizens for Tax Justice in Washington, a good friend of TJN's, is still going strong. And he's just produced sizzling new testimony in front of the U.S. Senate Budget Committee, which is currently pondering the distribution and efficiency of spending in the Tax Code.

Mcintyre's target is business subsidies in the U.S. tax code. He starts by filling in on the history. The 1986 Reagan tax reform was not, contrary to what many people today would assume, a wild tax-cutting exercise. Quite the contrary, in fact:
"Among other things, Reagan’s tax act curbed offshore corporate profit shifting, leasing tax shelters and numerous industry-specific tax breaks, and despite a reduction in the statutory corporate tax rate, increased corporate tax payments by 34 percent. Reagan also equalized the personal income tax treatment of wages and realized capital gains, and he made the tax system more progressive overall."
But then, of course:
"Lobbyists for corporations and wealthy individuals didn’t give up after 1986. They worked hard to regain and expand the tax subsidies that Reagan had taken away.
Much was undone during the Clinton and George W. Bush administrations, he notes: both the Democrats and the Republicans were at serious fault.
"By the early 2000s, corporate subsidies had risen so much that the average effective U.S. federal corporate tax rate paid by America’s largest and most profitable corporations on their U.S. profits had fallen to only 18.4 percent — barely over half the 35 percent statutory rate. 1 Those tax subsidies have grown even larger since then."
He makes three key arguments about these subsidies.

First, they are expensive. He draws out Treasury data to provide an (incomplete) list of tax subsidies for corporations, business owners and business investors comes with an estimated annual cost of a staggering $365 billion in 2011. That is, a billion dollars of subsidies per day - and this is most likely an underestimate.

His second argument is this:
"business tax subsidies are simply an economically useless waste of resources. That’s because companies don’t ask for subsidies that would force them to change their behavior. Why would they? Instead, they ask for subsidies to reward them for doing what they would do anyway."
Indeed, and just as TJN has said on many occasions. He cites tax breaks to Boeing as an example of economically harmful and inefficient subsidies, and cites earlier CTJ and ITEP reports:
"In all of these studies, we found no positive correlation between the amount of subsidies that companies received and their investment and jobs performance. That’s not shocking. After all, corporate executives (as opposed to their lobbyists) often insist that tax subsidies are not the basis for their investment decisions. Other things, they say, usually matter much more, including infrastructure, wage levels, access to markets, the quality of the workforce and so forth. . . . they generally cause harm, by reducing productivity, jobs, and economic growth"
Exactly. Once again, just as we've long argued too. (Here's one of those reports.) And then he identifies another category of corporate tax subsidies that are even worse: ones that tilt the playing field to favor foreign activities over U.S. investment and jobs.
"A major way that business tax subsidies hurt our economy and jobs is that some of the largest subsidies encourage corporations to shift profits, and sometimes jobs, offshore."
Profits earned in the U.S. should be taxed by the U.S., he continues, and corporate investments abroad should not have a tax advantage over local investments. This second thing happens because companies can defer their tax payments on overseas earnings - something that too often means the taxes never get paid (Mcintyre says 'deferred' is a euphemism for 'not paid.')

The Treasury reckons this deferred tax loophole costs $50 billion per year in lost taxes; Mcintyre argues that the true figure is much higher, because of those offshore subsidies not on the Treasury's list.

He notes how corporate lobbyists love to describe these offshore loopholes as job-creating, then goes to describe how General Electric helped write George W. Bush's "American Jobs Creation Act," providing $200 billion in corporate subsidies over 10 years, then saw its U.S. workforce fall from 54% of its total in 2004, to 46% by last year. The Congressional Budget Office tends to agree with McIntyre. As it says (p186 of this March 2011 report):
"the current system reduces the cost of foreign investment relative to that of domestic investment. . . . (eliminating this) would . . . increase domestic investment."
Next, McIntyre examines the claims of corporate lobbyists that U.S. corporations face higher tax rates than their foreign competitors. In a study of 275 companies, he found that three quarters faced higher effective foreign tax rates than U.S. tax rates: the average effective rate was 29.3% on foreign profits, versus 21.5% for U.S. federal and state taxes. In 2006-10, General Electric had an effective minus 15.8% U.S. tax rate (it got huge rebates) on U.S. profits, versus 19.6% on foreign profits. ExxonMobil showed a similar pattern.

There's more dynamite, too, on the subject of Mcintyre's third argument: that these corporate subsidies are fundamentally unfair. Mcintyre's CTJ is working on a large new study:
"our preliminary results so far suggest that corporate tax subsidies are now larger than corporate taxes paid."
That, if the final report backs this, is a true shocker. And on the subject of unfairness, there's plenty more:
  • Two-thirds of stock dividends paid to individuals, directly or into retirement plans or charitable coffers, are effectively taxed at a zero rate or less
  • Most capital gains on corporate stock are never realized and thus are never subject to income tax
  • About 70 percent of the tax savings from the low tax rates on the small portion of capital gains and stock dividends that is subject to personal income tax goes to the best-off one percent.
Goodness. That's rich folk converting their income so that it attracts a lower tax rate - courtesy of offshore, which drives tax rates on capital lower.

Once again, McIntyre skewers the arguments of those who suggest that corporate shareholders suffer double taxation (by virtue of paying corporate income taxes, and taxes on dividends:)
"When one adds up the federal income taxes paid by corporations and their shareholders, it is clear that there is no “double tax,” as some corporate lobbyists and economists claim. In fact, there is not even a single tax. In contrast, most wages are subject to both personal income tax and payroll tax. And this “double tax” adds up to a much higher effective rate on wages than the rate imposed on capital income."
It's a crucial point, and it goes hand in hand with this, further, shocker:
"This disparity between the relatively heavy taxation of wages and the light taxation of capital income is a key reason why combined federal, state and local taxes of all kinds are now virtually flat across all income groups from the middle of the income scale to the best-off one percent."
Which is very far from what economists and democrats have long advocated: in the words of Adam Smith:
"the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."
Something has clearly gone very, very wrong with the U.S. tax code, and it needs reforming. A good place to start, McIntyre argues, is with the offshore subsidies.
"Once we clean up our international tax mess, then we are likely to find it far more attractive to crack down on unaffordable and unwarranted domestic business tax subsidies as well."
Fireworks. Let's hope someone is listening.

Update: the CBO has just produced its own budget scenarios here.


Anonymous Jordan said...

Fantastic post. I really enjoyed reading it and it was quite edifying. I will never cease to be amazed at how easily people are fooled into thinking that corporations have it so hard in America. When the reality is that more and more of the burden has been shifted to the middle-class, which they cannot afford.

11:43 am  

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