Corporate Taxes


In
the past year President Bush proposed, and Congress approved, a
$1.6 trillion tax cut that reduced rates for most taxpayers and
made some significant structural changes, including eliminating
the estate tax. Corporate America felt left out when the President
rammed his tax cut through Congress. “Where’s our tax
cut,” it asked? “Be patient,” responded the Bush
administration. 

As
it turns out, corporate America had to wait only a few months for
its tax cut. As part of the economic stimulus package passed by
Congress in mid-March, businesses were granted accelerated depreciation
of new purchases. Depreciation may be an abstraction to most Americans,
but the tax break will reduce corporate taxes by $43 billion this
year. 

Media
coverage of the economic stimulus package focused on how the bill
had been significantly pared down from the one first offered by
House Republicans, which contained hundreds of billions in corporate
tax breaks. The mainstream media treated the original measure with
surprising disdain, delighting in reporting the billions in refunds
the bill would have provided to some of America’s wealthiest
corporations. However, once the Senate refused to grant large corporate
tax breaks and House Republicans were forced to remove them from
the bill, the media’s interest in corporate taxes waned. Had
they continued to investigate, the media would have discovered that
although House Republicans largely failed in their battle to significantly
slash corporate taxes (though $43 billion is hardly pocket change),
advocates of reduced corporate tax rates have been winning the war
for 30 years.           

According
to the IRS, in 1971, corporations paid 23 percent of income taxes
collected by the federal government. By the year 2000, the corporate
share of taxes had fallen to 17 percent. This reduction may seem
relatively minor unless we appreciate that individual taxpayers
were required to fill the gap left by the effective decrease in
corporate tax rates. If corporations had paid 23 percent of the
income taxes collected in 2000, as they did in 1971, the federal
government could have distributed an average rebate of $628 per
tax filer at no net loss of revenue. 

Corporations
are able to avoid paying the 35 percent tax on profits called for
under the law by taking advantage of thousands of loopholes. According
to a study conducted by the Institute on Taxation and Economic Policy,
250 of America’s largest corporations paid an average tax rate
of 20.1 percent in 1998. Many of these corporations, including Texaco,
Enron, and Goodyear actually received rebates from the federal government.
Indeed, one of the most striking aspects of corporate taxes is the
disparate treatment received by different industries. While some
industries, such as publishing and health care, pay close to the
standard 35 percent rate on profits, the petroleum and forest products
industries pay only 10-15 percent of their profits in taxes. 

Congress,
eager to appease corporate contributors, has largely ignored the
issue of corporate tax avoidance. However, in the wake of the Enron
scandal, a bill has been introduced in the Senate that would limit
the ability of corporations to reduce their tax liability by granting
employee stock options. Currently, corporations count stock options
as expenses for tax purposes, thereby reducing their taxes, but
often fail to include the value of options granted when reporting
profits. Corporations are thus able to overstate profits, driving
up their stock price, all the while limiting their tax liability. 

Corporate
America has banded together to fight for continued preferential
tax treatment of stock options. Given corporate opposition and a
House of Representatives that showered corporate America with billions
in tax rebates, tax treatment of options isn’t likely to change
anytime soon. However, it’s worth bearing in mind that options
represent only one of numerous tax loopholes corporations can exploit
to reduce their tax burden. Instead of focusing on options, Congress
could adopt a more comprehensive approach that would establish a
true mandatory minimum tax rate that corporations would have to
pay under all circumstances.           

Specifically,
Congress should strengthen the Alternative Minimum Tax (AMT) on
corporations. Congress established the AMT in the 1986 Tax Reform
Act to ensure that profitable corporations pay at least some federal
income tax. The share of income taxes paid by corporations increased
after 1986. However, laws passed in the 1990s weakened the AMT,
resulting in lower effective corporate tax rates. The AMT has been
eviscerated to the point where many large corporations routinely
receive tax rebates from the federal government. 

Congress
should require that corporations pay at least 20 percent of their
profits in taxes. This would effectively limit the extent to which
corporations could take advantage of deductions, thereby restoring
a measure of fairness to a system which favors some industries over
others and corporations over individual taxpayers. 

In
the buildup to April 15, mainstream newspapers often publish a stream
of articles related to federal taxes. This year, many of those articles
focused on the fact that the IRS audits low-income Americans, specifically
those who receive the Earned Income Tax Credit, much more frequently
than it does wealthy Americans. 

Citizens
should insist that Congress address the more fundamental issue of
corporate tax avoidance. Creating an enforceable minimum corporate
tax rate of 20 percent of profits would generate tens of billions
of dollars for the U.S. Treasury. Doing so would send a signal to
corporate America that playing by the rules involves more than just
reforming accounting practices.