If the last ten years of debt and jobs destruction have taught us anything, it’s that we must change our tax system and soon, or face economic disaster. Instead of maintaining our infrastructure, we are consuming it. Instead of investing in education and research with an eye to later wealth, we’re cutting our way to a poorer future.
Yet concerning taxes, which finance our civilization and distribute the cost, three great lies permeate society, all of which delay our doing what needs to be done. The first lie, with a nod to comedic candidate Jimmy McMillan, is that the tax is just too damn high. The second lie is that if you cut the rates, revenues will increase. The third lie is that taxes have become too complex for even an Einstein to understand.
Bruce Bartlett in The Benefit and the Burden and Martin A. Sullivan in Corporate Tax Reform demolish these lies with valuable primers, as complementary in their purpose as an easy chair and a reading lamp. Where ideological groups feed talking points to politicians and pundits, reducing the tax-policy discussion to a Gong Show of sound bites, Bartlett and Sullivan explain basic principles in English so readers can start to decode them. The authors’ timing is perfect, too. Major corporations, emboldened by the Supreme Court’s 2010 Citizens United decision, are gearing up to press Congress for lowered rates, favors, and loopholes. Representative Dave Camp, the Michigan Republican who chairs the House Ways and Means Committee, and Senator Ron Wyden, an Oregon Democrat, have signaled a readiness to push for major corporate tax code changes. The 2012 elections will surely bring the next round of the tax debate into sharp focus.
Despite all the political rhetoric about excessive taxes, federal tax revenues are at their lowest point since Harry S. Truman’s presidency. In Barack Obama’s first three years, federal taxes slipped from a little less than 15 percent of the economy to 14.4 percent, far below the 17.6 percent to 20.6 percent range from Ronald Reagan through George W. Bush.
Adjusted for inflation and population growth, the individual income tax brought in a third less revenue in 2011 than it did in 2001, when the Bush tax cuts began. Corporate tax revenues were down 6.2 percent by the same measure, despite recently soaring profits. According to tax-return data, nonfinancial corporations at the end of 2009 were hoarding more than $3 trillion in cash, a figure that has surely grown since. That’s $10,000 of idle cash per American, a vast reserve army of capital as much in need of employment as the 24 million or so Americans who can’t find a job or as much work as they want.
In fact, had Obama not acquiesced to extending all of the Bush tax cuts through 2012, we would be on our way to manageable budget deficits. Even so, this year the budget deficit will fall back to less than a trillion dollars—a major achievement under the circumstances, but not hailed as such in our poisonous political climate.
Bruce Bartlett is a Republican policy wonk turned columnist who worked since 1976 for conservatives, including Ron Paul and Jack Kemp, and for the Reagan and George H. W. Bush Treasury Departments. That career path changed when his 2006 book, Impostor, called out George W. Bush as the ultimate big spender. In his new book, Bartlett gives a broad overview of federal income-tax policy. He argues that people want more government than they have been willing to pay for, and chronic deficits are no longer sustainable. He dismisses Grover Norquist’s mission to “starve the beast” of government as nonsense but favors reducing America’s corporate tax rate because only Japan has a higher one. He sets forth political conditions necessary for reform: courage for Democrats and compromise for Republicans. “Higher revenues will have to be a major part of a long-term deficit solution,” he writes. (But so, he argues, will reducing benefits for the elderly.)
Martin A. Sullivan, a former Treasury economist now with Tax Notes magazine, and a nonideological technocrat, helpfully focuses on the often-overlooked subject of corporate income taxes. He reminds us that although President Reagan said in 1983 that the corporate income tax “is very hard to justify,” he signed a 1986 law raising corporate tax rates, which shows that “popular sentiment against corporate tax cuts is a far more potent political force” than any economic evidence that high rates discourage investment and, in the long run, cost jobs.
To deal with an aging population, the debt run up under Reagan and the Bushes, and the much larger recent budget shortfalls under Obama, both authors say that we need to raise federal taxes as a share of the economy. This is a truth acknowledged by all but Norquistians, whose ranks have begun to splinter. Both books chart a regression since the last major overhaul, the 1986 Tax Reform Act, as special interests succeeded in larding the system with favors for the political donor class, from rules letting many of the rich delay paying taxes for years—or decades—to accounting that lets corporations slip profits out of the country as business expenses. Both authors also show that the Fair Tax, promoted loudly with billionaire backing by radio talk-show host Neal Boortz, is silly and unworkable. A national retail sales tax, it would invite black markets; out of resulting pressure to ban cash it could end up making all transactions digital, giving government and litigants a perfect record of what you spent and where.
Bartlett writes that “the tax code is like a garden” in which no serious weeding has been attempted in 25 years, while “many new plants and flowers have been added without regard to the overall aesthetic.” Sullivan believes that “a scandalously large amount of America’s brain power is devoted to the corporate tax.” In his view, especially, the elegant minds of tax lawyers, accountants, and derivatives designers could be put to productive use if we changed the tax rules for corporations to end game playing. To anyone who has heard that General Electric’s electronic tax return, if printed out on paper, runs 57,000 pages, Sullivan’s criticism makes sense. Without basic reform, though, cutting tax rates may not reduce demand for tax-avoidance specialists.
Sullivan, like Bartlett, operates from an unstated assumption: that tax and shareholder accounting should remain separate. Each author touches lightly on distortions caused by a 1954 federal law that lets companies depreciate new plant and equipment faster for tax purposes than for reporting to shareholders. But Robert Solow showed in 1956 that this law was based on false economic reasoning because accelerated depreciation did not, in fact, increase long-term growth. It was an insight for which Solow later won his Nobel Prize in economics. The intellectual father of accelerated depreciation, Evsey Domar, acknowledged in 1957 that Solow was right, yet this law still bedevils. While Republicans denounce Obama as an anti-business socialist, on his watch corporations got to write off immediately either more than half or all new investment, a capitalist dream come true.
Neither Bartlett nor Sullivan challenges the 1954 law’s requirement that companies keep two sets of books, an offense to simplicity and transparency. The authors also ignore how the corporate income tax enriches utility--holding companies by forcing customers to pay income taxes embedded in rates for electricity and other monopoly services, allowing the holding companies to then permanently pocket some or all of that money.
Here is a simpler solution: Keep one set of books. If companies were taxed on profits they report to shareholders, the line for corporate income taxes that appears in financial statements would match the taxes paid. We could even hang on to the tax credit companies get to claim for research to develop and refine processes and products, as both authors favor. All that retaining the research credit would take is adding one line to financial statements, under the tax line.
For publicly traded companies, this would align the interests of taxpayers and business, because both seek maximum revenue. Tax revenues could be expected to rise, while compliance costs would fall dramatically. For capital-intensive companies, which spend heavily on machinery rather than workers, the change would bring in more immediate revenue as deferrals finally end.
The move to a unified accounting system could also lay the early groundwork for discussion of a reform not yet politically viable but favored by both Bartlett and Sullivan—a value-added tax (VAT), which like universal health care has been established in almost every modern country except the United States. A VAT applies to consumption at each stage of production, from the mining of ore to the installation of your new dishwasher. Republicans worry that a VAT would be a huge revenue generator, while Democrats fear how hard it would hit the poor and middle class. But the framers intended taxation to be, in part, a political decision. Resolving these concerns and designing a VAT with protections for those less than wealthy is not so difficult.
Both Bartlett and Sullivan recognize that for too long too much of our tax debate has been about statutory tax rates, while far too little has been about what we tax and what our tax money buys. I would add another concern: the cost we citizens bear for policies that allow big corporations and hedge-fund managers to delay paying taxes for years or decades. We pay interest on borrowing against those delayed revenues, after all, and over time, inflation erodes the value of the taxes ultimately paid.
Our Constitution gives Congress almost unfettered taxing power because the framers understood that taxes must flow from the economic order of the day. In agrarian societies, the sovereign took a share of the crop. In manufacturing-based societies, governments have taken a share of profits and wages.
We now live in a global, digital services economy. We need a system that taxes all profits equally, made simpler and less intrusive by unified accounting. We need timely instead of deferred payment of taxes, and policies to lubricate the wheels of commerce, not throw sand in the gears. America cannot prosper if we remain tied to an era that has passed—a 20th-century tax structure designed when computer was a job title. Bartlett’s and Sullivan’s books, if enough people read them, will help us move away from sound bites signifying nothing toward a debate on how much of a tax burden we want to bear and how we want to distribute that burden.