Con: Businesses large and small need more consumers—not more tax breaks
WASHINGTON EDITOR’S NOTE: The writer is addressing the question, “Is tax reform necessary to ensure America’s fiscal stability?”
To paraphrase the old saying about horses and water, you can give a corporation money, but you can’t make it spend.
Thanks to record profits, essentially zero short-term borrowing costs and extremely low effective tax rates, U.S. companies are sitting on more than $1 trillion in cash. Further business tax breaks—while deepening our nation’s fiscal crisis—will do nothing to provide the real incentive companies need in order to invest in our economy: strong consumer demand.
Claims that federal business taxes are too high usually cite the nominal corporate tax rate of 35 percent. But what really matters is not the official rate, but how much companies actually pay, and by that measure corporate taxes are already very low.
A study released in 2011 by Citizens for Tax Justice of 280 Fortune 500 companies found that their average effective tax rate over the previous two years was just 17.3 percent, less than half the statuary rate.
More than one in 10 of these profitable companies paid no federal corporate taxes at all over that period, and some actually got money back from the government.
How do companies get away with paying less than the official rate? They use a variety of loopholes they’ve successfully lobbied for over the years—breaks they’ve always claimed would help them expand and create jobs.
But these special favors, which range from writing off the cost of equipment much faster than it actually wears out to playing accounting tricks with the stock options they use to pay their top executives, have only wound up enriching corporate treasuries, stockholders and CEOs while doing nothing to boost the general economy.
Corporations also avoid U.S. taxation by sheltering cash in overseas tax havens. Through financial self-dealing, they concentrate their profits in low-tax or no-tax nations while keeping their deductions home. Such strategies can quickly drop a company’s domestic tax obligation to zero or even qualify it for a refund from Uncle Sam.
The result of all this tax avoidance is that corporate tax collections as a percentage of the overall economy are at their lowest level since the end of World War II. In other words, far from being overtaxed, Corporate America is failing to do its fair share in supporting the American government and society to which it owes so much of its success.
Some argue that because the percentage of Americans who own corporate stock—directly, or indirectly through retirement accounts and pensions—has grown in recent decades, tax breaks that ultimately benefit shareholders through dividends or capital gains contribute to economic growth. But while roughly half of all households have some ownership interest in stocks, only a third have holdings worth more than $5,000.
Meanwhile, the wealthiest 1 percent of households own 40 percent of the value of all stocks holdings; the top 20 percent account for 90 percent of stock-value ownership. For the vast majority of Americans, wages and salaries continue to be their main source of income—and these have famously stagnated over the same period that corporate tax breaks have proliferated.
Instead of cutting already low effective rates, corporate tax reform should focus on ending incentives to send profits and jobs overseas and making sure all companies pay their fair share. Increased tax contributions by America’s profitable corporate citizens must be part of the solution to our federal budget crisis.
Greater public revenues from corporations and their wealthy stockholders could then be used to create what Corporate America really requires in order to expand and prosper: a financially healthy middle class.
Through immediate expenditures rebuilding our crumbling roads, bridges and schools; as well as longer-term investment in research, education and health care, together we can create the confident consumers business needs to succeed.
Don Kusler is executive director of Americans for Democratic Action. Readers may write to him at ADA, 1625 K Street NW, Suite 102, Washington, D.C. 20006; website: www.adaction.org.