(By Rock The Capital’s Tom Dochat) As the crazy year of 2010 expires, everyone’s attention has been focused on the Bush tax cuts.
But whatever happened to the corporate tax discussion? In fact, has there even been a corporate tax discussion this year?
Back in February, Sens. Ron Wyden, D-Ore., and Judd Gregg, R-N.H., introduced a tax simplification bill to reduce the number of individual tax brackets to three and to shave the federal corporate rate from 35 percent to 24 percent.
More recently, the Bowles-Simpson deficit reduction panel proposed a corporate tax reduction to 26 percent.
But those proposals have been lost in the cacophony of the Bush tax cuts and millionaires and tea partiers and the unemployed and estates and the stalemate that has become the standard operating procedure between Congressional Republicans and Democrats.
The Wyden-Gregg bill appears dead in the water. No action is expected before the end of the year, and Gregg won’t be back in 2011 because he’s retiring.
The Bowles-Simpson deficit reduction proposals, which include the lower corporate tax rate, couldn’t even generate a strong majority support from its panel before being forwarded to Congress.
Corporate taxes are a constant issue of contention between business interests and others who think businesses spend too much time with tax lawyers trying their best to limit their tax liability.
Business interests argue that the American rate is too high and has become uncompetitive against other countries that have lowered their rates throughout the decade. In a May report from the Cato Institute, the libertarian organization noted that “of the 30 nations in the Organization for Economic Cooperation and Development, 27 cut their general corporate income tax rate since 2000, with an average cut of more than 7 percentage points.”
“By contrast,” said Duanjie Chen and Jack Mintz, who wrote the Cato paper, “the past decade is a lost one for U.S. business tax reform. Unlike most OECD countries that cut their corporate income tax rates or reduced other taxes on business investment, the United States enacted some targeted preferences while maintaining a very high federal corporate rate.”
Cato said the effective tax rate in the U.S. in 2009 (effective rate is the actual federal and state taxes paid on taxable income) was 35 percent, compared with 19.5 percent for the OECD, on average.
But others argue that the U.S. corporate tax issue is a mirage. “Government and independent researchers have long pointed out that the top statutory corporate tax rate is an incomplete measure at best of the burden of corporate taxes,” wrote Chye-Ching Huang in an October 2008 paper for the Center of Budget and Policy Priorities, a Washington organization that focuses on tax policy impact on low-income families. “It does not take into account the generous depreciation rules, exemptions, deductions, and credits (some of which are sometimes termed ‘loopholes’) that corporations may be eligible for. Those special provisions lower corporations’ effective tax rate, or the share of their profits they actually pay in taxes, and do so in a way that creates different rates for different industries.”
Between 2000 and 2005, Huang writes, corporations in 19 of the OECD member counties paid 16.1 percent of their profit in taxes, while corporations in the U.S. paid, on average, 13.4 percent. The Brookings Institution observed in 2007 that the U.S., despite its high statutory tax rate, “has so many generous special tax preferences for businesses, it collects the fourth lowest corporate tax revenues as a share of GDP among OEDC countries.”
Two Harrisburg area companies illustrate the divergence in their effective tax rates. The Hershey Co., which has 86 percent of its sales in the U.S., had an effective tax rate of 35 percent in 2009. (Its effective tax rate was 36.7 percent in 2008 and 37.1 percent in 2007.) In contrast, Harsco Corp., a diversified industrial services business with more than 65 percent of its sales outside the U.S., had an effective tax rate from continuing operations of 11.6 percent in 2009, according to its annual 10-K filing. Its effective tax rate in 2008 was 26.7 percent, and 30.7 percent in 2007.
Why so much lower in 2009? According to Harsco’s 10-K, the drop reflected a “decline in earnings in jurisdictions with higher tax rates, a change in the permanent reinvestment in current-year earnings, and certain net discrete tax benefits recognized in 2009.”
Harsco added that it expects an effective tax rate of approximately 24-26 percent in 2010, before discrete items. Through the first nine months, its effective tax rate was 26.2 percent. Hershey’s was 38.5 percent through the first nine months, and expects its rate to be approximately 37 percent for the full year. As a caveat, to its shareholders, Harsco’s 10-K observed that there are pending proposals affecting U.S. tax rates, and some could impact the company’s ability to defer U.S. taxes on profits permanently reinvested outside the U.S.
“It would be disastrous for the U.S. economic engine if the United States were to move toward a global tax regime with no opportunity for deferral,” Michael Kolinsky, Harsco vice president of global tax, said in an email issued through Harsco’s corporate communications office. “We should be moving away from a system that penalizes U.S.-based companies for attempting to compete successfully in the global market.”
Deferrals allow companies to defer their tax liability on foreign earnings until those earnings are repatriated to the U.S. A February report from the Tax Foundation notes that U.S.-based multinational corporations “operate at a distinct tax disadvantage, and deferral is the principal provision that makes the difference tolerable.”
The Tax Policy report also observed that many countries are not only lowering their tax rates, but they are moving toward a territorial tax system where profits are taxed only where they are earned. The U.S., meanwhile, operates of a worldwide system where income is taxed based on the rates in the home country.
“U.S. multinational corporations are taxed on their worldwide incomes,” the Tax Policy report said. “However, active earnings are generally not taxed until repatriated to the United States, at which time the U.S. corporate income tax must be paid minus credits claimed for foreign taxes paid … The option of deferral combines with the high U.S. corporate rate to create an incentive for firms to hold their active income earned abroad overseas.”
The Wyden-Gregg bill, with its lower corporate tax rates, proposed eliminating the rule allowing U.S. companies to defer their taxes on foreign income. Harsco’s Kolinsky said the company opposed enactment of the bill because it would “make it even more difficult for U.S. multinationals to compete in the global marketplace.”
The bill also proposed ending a number of other tax breaks that companies use to lower their liability. Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities in Washington, said tax rules favor capital-intensive industries, those with debt over equity, and those with more substantial foreign interests.
“One of our mantras is broaden the base and lower the rate,” said Mark Robyn, a staff economist with the Tax Foundation in Washington. His organization is hardly alone.
But he notes that some companies “benefit greatly” from some of the provisions in the tax code that allow them to reduce their liability. “They are very well organized,’ he said, and “they’re willing to fight” for these tax benefits.
“People are loss adverse,” said Marr. “It hurts more to lose something than to gain something of equal value.”
Marr said he would support a lower corporate tax rate, “as long as it broadens the base sufficient to raise additional revenue.” Now it not the time to cut back on revenue-generating resources, he said.
Marr said he expects tax reform to be an item of discussion in the coming years, especially business taxes. “You’ll see a lot of noise on tax reform, probably in the next couple years,” he observed. But he said,“it’s hard to see it moving quickly.”
Larry Smar, communications director for U.S. Sen. Robert P. Casey Jr. of Pennsylvania, said it was “unlikely” that Wyden-Gregg would make it to the floor before the end of 2010. But he added he “would expect that there will be more discussion on this topic next year.
“Sen. Casey is supportive of efforts to examine the tax code for possible changes to make the tax code more efficient,” he said. Perhaps the issue can be addressed before the Bush tax cuts come up again in 2012.
(Want to read more about Huang and Stone’s analysis, then click on Rock The Capital.)
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