April 25, 2011

A (Tea) Party for Tax Reform

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Tax season may be over, but the tax debate is not. Amidst all the clamor of calculating income, itemizing deductions and filing returns, Americans were caught with the news that (unlike the more than 90 million individuals who did pay taxes in 2010), a number of highly profitable corporations owed nothing to Uncle Sam. General Electric, Bank of America, Citigroup and Boeing — just to name a few — avoided paying any federal income tax, despite each having made hundreds of millions, if not billions, in profits.

This news predictably did not sit well with taxpayers.  After all, misery loves company — it’s just that companies have become pretty adept at avoiding it.

Large corporations’ successful tax avoidance schemes were the subject of much media attention recently. General Electric, one of the largest corporations in the world, came under a particularly great deal of scrutiny for paying no taxes despite making $14.2 billion in profits worldwide, with $5.1 billion coming from the United States. Though anti-corporate outrage witnessed a resurgence, widespread tax avoidance isn’t a new phenomenon, nor has it necessarily been underreported in recent years: Similar stories were written about companies last year, and a 2008 study by the Government Accountability Office found that two out of three American corporations avoided paying federal income taxes between 1998 and 2005.

If you’re wondering how corporations are able to get away with paying so little in taxes, there’s a good explanation for it: the practice is entirely legal. There is a distinction to be made between tax avoidance, which involves taking advantage of deductions, credits and loopholes in the tax code, and tax evasion, which involves using fraudulent methods to escape tax payments. To be sure, the latter occurs despite its illegality, but insofar as companies capitalize on loopholes written into tax law, they are perfectly within their rights to do so.

Corporate auditors and accountants parse through an incredibly lengthy and convoluted amalgamation of tax laws to find ways to reduce tax bills, but some tax breaks get handed to corporations on a silver platter. Tax expenditures — special provisions written into law with the expressed purpose of reducing the tax burden of a particular subset of taxpayers — are often passed at the insistence of corporate lobbyists. Consequently, we have a system that enables highly profitable multinational corporations to avoid paying their share of income taxes.

Tax expenditures don’t exclusively benefit corporations, however. In fact, most Americans benefit from some form of tax expenditure, including the Child Tax Credit, the Mortgage Interest Deduction and (especially amongst us students) deductions for tuition expenses. The collective size of tax expenditures is astounding: Each year, they account for an estimated $1.2 trillion dollars in lost revenue. Yet despite their significance relative to the size of the government budget, tax expenditures lack the visibility of government spending, and therefore persist without much deliberation or scrutiny.

That might all be changing, though. Republicans and Democrats are in the beginning stages of what promises to be a long, hard-fought war over the proper method for deficit reduction, and tax expenditures will inevitably have to be addressed. As this fight gets underway, however, the (re)revelation about corporate tax breaks has produced a rather noteworthy schism on the right.

There is little doubt that the Republican backlash in the 2010 midterm elections owed much of its strength to prominent “grassroots” (save the involvement of Murdoch and the Kochs — but let’s leave that for another column) conservative movements, primarily the Tea Party. These movements were purportedly premised on the fundamentals of fiscal conservatism: less government spending and lower taxes.

Given their vehement opposition to high taxes, you would think that news of successful corporate tax avoidance would be appreciated. Instead, it’s thrown the right into a state of confusion.

To begin with, the fact that a majority of corporations pay no federal income tax has undercut the explanation that high taxes are to blame for slow job growth; in reality, taxes couldn’t functionally be any lower. Moreover, even some staunch right-wingers are becoming skeptical of the proverbial free lunch given to corporations through hefty tax expenditures. They have argued in response that corporations aren’t paying their “fair share,” which begs the question of what Tea Partiers envision that “fair share” to be.

The Tea Party seems to be suffering from some cognitive dissonance. On the one hand, they advocate reducing taxes below their status quo levels, and, on the other, they argue that corporations aren’t presently paying enough in taxes. Sorry to say, but you can’t have it both ways. Even if the nominal values of the marginal tax rates were decreased, corporations would still have to pay higher taxes by losing loopholes.

So how will the tax expenditures debate be resolved? The Bowles-Simpson tax plan advocates doing away with them altogether, while correspondingly reducing the marginal tax rate. Paul Ryan has similarly called for reducing tax expenditures in his budget, although he thus far has failed to outline which ones he would remove. In their present form, neither plan is likely to be adopted, but they do show a willingness on both sides of the isle to give tax expenditures a much needed looking over. The increasing opposition on the right to frivolous corporate tax breaks also signifies that tax expenditure reform may be politically viable despite the pronounced polarity in Congress. Obama, too, has shown is intent to capitalize on the discontentment: Next month, he will release a plan to reform corporate tax policy.

Tax policy may not be the most exciting topic to end this year’s run of columns, but it is an important one. As this year’s tax avoiders have demonstrated, our country is in dire need of reform — when even Tea Partiers are telling you that corporate taxes are too low, you know there’s a problem.

David Murdter is a junior in the College of Arts and Sciences. He may be reached at [email protected]. Murphy’s Lawyer appears alternate Tuesdays this semester.

Original Author: David Murdter