This piece is the fifth in a six-part series on taxation, and a joint project by The American Prospect and its publishing partner, Demos.
There is no shortage of alarmism when it comes to corporate taxes. Earlier this year, Mitt Romney said that the U.S. tax code “looks like it was devised by our worst enemy to tie us in knots.” A more recent memo drafted by the Senate Republican Caucus claimed that the “corporate income tax harms workers, consumers, job creation, investment, and innovation” (you have to wonder what else exactly is left).
These statements are enough to scare anyone into thinking that the entire U.S. economy will crumble if corporate tax rates aren’t slashed tomorrow. But, as Republicans often claim, are U.S. corporate tax rates really among the highest in the world? And are workers really so dependent on protecting corporate profits? More important, is there any reason the U.S. shouldn’t raise more revenues from corporations during this time of great fiscal need?
Falling Corporate Taxes
Those pushing for corporate tax cuts commonly cite the fact that, as of April 1, 2012, the U.S. officially has the highest corporate income tax rate in the world. When you add together federal, state, and local taxes, the combined rate shakes out at 39.2 percent.
Of course, nobody really pays that: A widely-cited study last fall revealed that the 280 most profitable corporations in the U.S. collectively paid an average rate of 18.5 percent from 2008-2010. Seventy-eight of these corporations actually paid zero in taxes during one of these years. The disparity between the official, statutory corporate tax rate and the effective rate is due primarily to the countless deductions and exemptions that corporate lobbyists have successfully woven into the tax code over the years.
The good news is that a growing bipartisan consensus has developed around the idea of seriously rolling back these deductions. The bad news is that President Barack Obama’s framework for corporate tax reform, put forth in February, advocates making it revenue-neutral. This outcome would contrast starkly with the last major overhaul of the corporate tax system in 1986, signed by President Ronald Reagan, which closed loopholes while increasing overall revenues.
Consider the budgetary impact of revenue-neutral corporate tax reform. In 1955, corporate taxes made up 27.3 percent of all federal revenue; today, that share is estimated at 9.6 percent. And although soaring corporate profits have driven steady GDP growth over the past decades, corporate taxes as a share of GDP are a quarter of what they were in 1955.
Revenue from corporate taxes has not only fallen from its historic level, but also remains significantly below that in other countries. While corporate taxes make up 1.5 percent of GDP in the U.S. today, they are 1.9 percent of GDP in Germany, 3.3 percent in Canada, and 3.9 percent in Japan. The average of corporate taxes among member nations of the Organisation for Economic Co-operation and Development (OECD), a European group that promotes economic and social well-being around the world, is 3.5 percent.
These statistics underscore how misleading it is to claim that the U.S. imposes a uniquely onerous tax burden on corporations compared with other developed countries. In fact, the opposite is true. With this added revenue, moreover, our global competitors have more resources to fund the infrastructure projects and human capital programs that are vital to securing an upwardly mobile and internationally competitive economy. By insisting on revenue-neutral corporate tax reform, we risk making this imbalance worse even as global economic competition intensifies. Already, the fiscal crunch in the U.S. has driven cutbacks in education at a time when key indicators show the U.S. falling behind in this crucial area.
Rising Corporate Profits
Consider the other alarm bell sounded by those calling for more corporate tax cuts—namely, that easing up on corporate tax rates will benefit workers and help create jobs.
Again, the facts suggest otherwise. The first two years after the official end of the Great Recession, more than 84 percent of all growth in national income went exclusively to corporations. American workers, meanwhile, were able to grab just 4.4 percent of income growth in the post-Recession recovery.
In other words, in a head-to-head match-up between corporations and American workers, corporate profits accounted for nearly all of the already-limited spoils of the post-Recession recovery. This is particularly incredible given corporate profits remain a comparatively small share of total national income in any given year—around 10 percent in 2009 and 2010—while workers incomes account for over 60 percent in the same period.
These numbers say one thing very clearly: When it comes to bouncing back from a serious economic contraction, it’s not the case that “workers, consumers, and job creation” all benefit from higher corporate profit margins. And if that’s the case, then why—as even President Obama has proposed—would we limit the scope of corporate tax reform strictly to those proposals that do not require corporations to contribute more to the public pool? Haven’t corporate profits seized enough of it already?
Corporate profits will only become more resilient and foster greater inequality as the financialization of the U.S. economy continues. But Wall Street is not alone—corporate America, including the major low-wage employers in the retail and food services sectors, has collectively demonstrated superior power and might over American workers in the contest over who gets what.
The Need for Revenue-Positive Reform
Against this backdrop, revenue-positive corporate tax reform is non-negotiable. Not only would more progressive corporate taxation reverse the trend of growing inequality, it would also raise funds needed to expand wage-support programs like the Earned Income Tax Credit, which are only going to become more crucial as low-wage jobs proliferate in the post-recession recovery.
Closing all corporate tax loopholes while only modestly lowering top corporate tax rates would raise tens of billions of dollars in new revenue per year. A prudent overall goal is to move corporate tax revenues to just under the OECD average of 3.5 percent of GDP. Whatever the specifics, the guiding principle is that revenue-positive corporate tax reform must be accepted as an imperative of our fiscal policy.
Given the role that corporate profits play in exacerbating inequality, it is important to understand corporate tax reform as a key component of social policy in the U.S. Revenue-positive tax reform would therefore not only help balance the budget, but also balance the playing field between workers and corporations.
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