Why corporate tax reform is so messy
The importance of cutting the 35 percent corporate tax rate has become a mantra in Washington, but here’s the thing: Most companies don’t pay it.
President Donald Trump, who continues to push for slashing the rate to 15 percent, frequently says that U.S. corporations pay the highest taxes in the world. But that rhetoric masks some key facts.
Like individual taxpayers, corporations take deductions and credits that reduce the amount of taxes they actually fork over to the IRS. The average effective tax rate on corporations is 23 percent, according to the Treasury Department, one-third below the sticker price, though still higher than many other developed nations.
And that average hides a wide variation in what different industries and businesses pay, with some — retailers, like Walmart, for example — paying close to 35 percent. Others, like technology and pharmaceutical firms, pay a fraction of that, or even nothing at all.
That's partly because some are able to use clever lawyering to avoid paying, by stockpiling profits in overseas tax havens, for example.
But much of it is also the result of decades-old provisions in the tax code that enjoy broad bipartisan support, such as special breaks for research and development that are hugely important to some industries and meaningless to others.
“A lot of this stuff that causes these differences across industries is very deliberate,” said Adam Looney, a former top Treasury Department tax aide. “They’re not loopholes — they’re things people want.”
Reducing the statutory rate is a centerpiece of Republican tax reform efforts — to 20 percent in the House GOP proposal and 15 percent in Trump's. Both proposals would cost well over $1 trillion.
Trump, before a meeting Tuesday with top lawmakers and administration officials trying to negotiate a tax deal, pointed to strides the economy has made in recent months.
"But if we're going to keep this momentum going and allow the economy to truly take off as it should, it is vital that we reduce the crushing tax burden on our companies and on our workers," he said. "We pay the highest tax of any country in the world on businesses and we can't keep doing that."
The picture is much messier, though, than what often emerges from the corporate tax-reform debate in the capital, and that helps explain why lawmakers have so much trouble getting an overhaul off the drawing board.
Because companies pay such differing rates, they don’t agree on how to change the system — some want to push the corporate rate as low as possible while others would be happy with a higher rate provided they can hang onto their favorite tax breaks.
It’s also why the two political parties sometimes seem like they're talking past each other.
Republicans, who emphasize the statutory rate along with the companies that pay close to it, often paint businesses as victims of a punishing corporate tax code. Rep. Peter Roskam (R-Ill.), head of the Ways and Means subcommittee on tax policy, has likened the recent string of companies re-incorporating abroad in so-called inversions to a “prison break.”
Democrats point to companies paying well below 35 percent, arguing they are not paying their fair share and that the corporate tax system is not as out of whack with international norms as Republicans contend.
“Talking about effective tax rate and tax rates in general is a choose-your-own adventure deal,” said Kyle Pomerleau, an economist at the nonpartisan Tax Foundation. “People will choose which rates line up with their world view.”
Trump still pushing for a 15 percent corporate rate
It’s true the 35 percent rate is high by international standards. Combined with state taxes, it’s 15 points higher than the average among peer economies, and far higher than Hungary (9 percent), Ireland (12.5 percent) and the United Kingdom (19 percent). It even tops France’s 34.4 percent.
What’s more, unlike most other countries, the U.S. taxes companies on their worldwide earnings, not just what they make at home.
But what companies typically pay, after credits and deductions is much lower, though estimates vary. They range from a high of 29 percent, pegged by the CBO earlier this year, to a low of 14 percent for large profitable firms between 2008 and 2012, according to the Government Accountability Office.
The figures vary so much because of an accounting conundrum. While dividing a companies’ taxes into its profits may seem like basic math, there are different interpretations of what counts as profits. The numbers can swing wildly depending on whether only domestic income is included or international as well.
Including companies that lose money will drag down the average, because businesses only pay taxes on their profits.
Even when effective rates are calculated can be controversial. Measuring them in the wake of the recent Great Recession would show lower tax bills because companies could carry forward losses they sustained during the downturn.
“It is a bit of a muddle, and this is why you will see hugely conflicting statements about whether U.S. companies have high or low effective tax rates,” said Peter Merrill, a principal at PwC and former Joint Committee on Taxation economist. “For all the different ways to do it, the U.S. is high relative to its peers, but you get a different answer depending on which measure you use.”
What’s not in dispute is that different companies pay very different rates.
Construction companies paid an average 30.3 percent rate while retailers paid 27.9 percent, the Treasury Department said last year. At the other end of the spectrum are utilities, with an average rate of 14.5 percent, and mining at 21.6 percent.
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