by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Back-to-back columns in the latest issue of Fortune magazine explain that people worried about so-called tax inversions (which might not be as worrisome as the Obama administration has suggested) ought to address the underlying problem: the corporate tax code.
Inversions are just a symptom of a bloated, unwieldy corporate tax code that is sorely in need of an overhaul. The tax code was last updated in 1986, and ever since, lobbyists have been inserting loads of exemptions, loopholes, and sweetheart deals. “This town I live in is full of lobbyists, and a lot of them [are] business lobbyists,” says Washington, D.C.–based Will McBride, chief economist for the Tax Foundation. “There’s a lot of funny stuff in there.”
That’s no joke. All told, corporate “exemptions” (a.k.a. loopholes) are expected to cost the U.S. $148 billion of revenue this fiscal year, according to the Office of Management and Budget. (The government collected only $221 billion from corporate taxes in 2011.) That’s not to scoff at every tax break out there—targeted tax breaks can start out as reasonable incentives to keep jobs here in America or promote research and development or other laudable policies. But sooner or later those tax breaks get exploited and abused by creative accountants seeking an advantage. Take the deduction for manufacturing products in America. It started out as a tax incentive to protect high-paying jobs in heavy industry. But today it seems as if just about every corporation is calling itself a manufacturer, at least as far as the IRS is concerned. In fact, the industries that most heavily rely on the “made in America” deduction—relative to industry size—include publishing, broadcasting, and motion pictures.
The big winners are big businesses, which can afford to employ legions of accountants and tax lawyers. The big losers: small businesses, which can’t afford to follow suit and so are trapped in a lopsided system. As the head of one big business quipped to me recently, “It’s the best tax code money can buy.”
Even if Washington finally gets around to reducing corporate tax rates, what’s to prevent other countries from lowering theirs even more? It’s just too tempting and easy for many American businesses to move, particularly when they can realize other savings, such as lower labor costs. What a game changer it would be if instead we simply eliminated corporate income taxes altogether. We would dramatically decrease the cost of doing business here, ease pressure on U.S. wages, bring back jobs, and repatriate an estimated $2 trillion in corporate profits now sitting overseas to avoid our top 35% tax rate.
Progressives mistakenly see corporate income taxes as a way to tax the rich. But we aren’t taxing the rich; we’re taxing a corporate entity, and studies show that much of the tax is passed on to employees and customers, not shareholders.