Time to Scrape the Corporate Tax Barnacles

If you own a boat, or have a friend who does, you know that it has to be hauled out periodically to scrape and paint the bottom. Neglect this and over time the barnacles grow so thick that despite cranking up the engines you can barely make 10 knots. Not to mention burning prodigious amounts of fuel.

The corporate tax code is very much the same. Every generation or so it has to get hauled out to scrape off the encrustations of tax breaks that this Congressman or that has doled out to one special interest group or another. Neglect this and over time not only does government revenue decline, despite world-beating tax rates, but corporations twist themselves into so many knots that the entire economy suffers.

We have reached that point.

No sane economist believes that having a corporate tax rate among the highest in the civilized world helps make American companies more competitive. Mercifully, very few companies actually pay that 35% rate. But the way in which this happens is an opaque, inefficient, corrupt, and unjust mess.

Savvy corporations employ armies of tax experts that inveigle themselves deep into a company's operations. These professional tax avoiders restructure businesses, warp product strategies, yank about supply chains, monkey with transfer pricing, shuffle funds through shell subsidiaries, invest in questionable financial transactions, and concoct a thousand machinations that bear no relation whatsoever to making a company's products or services better. But they do impact how much of a company's earnings shareholders get to keep.

The larger firms also hire legions of lobbyists who lay the ground work for the tax breaks of tomorrow. Allying themselves with this political faction or that, long term relationships are established wherein Congressmen "friend" certain industries in return for ongoing campaign support.

But it doesn't end there. The largest corporations also engage in a form of legalized graft where associated charitable foundations make gifts to causes dear to the hearts of powerful committee chairman or the constituents that elect them. You scratch my back and I'll scratch the backs that scratch yours. Just ask Charlie Rangel, there's no corruption here!

Layered on top of it all is the ever present Santa Claus of Industrial Policy, handing out targeted subsidies and deductions to aid and influence industries deemed critical to the next reelection campaign. Like mohair subsidies, still with us after being passed to ensure a steady supply of uniforms for World War I. And the ethanol monster, eating its way through our food supply as it drives up gas prices.

All of this is entirely legal, allowing us to look down our noses at the behavior of grasping third world kleptocrats who don't bother with the tax code charade and just deal direct.

Poster child for what is wrong with our corporate tax code is the behemoth General Electric, a company with a well-deserved reputation of being good to its customers, its employees, and its shareholders. GE reported worldwide profits of $14.2 billion in 2010 and paid ... negative $3.2 billion in US corporate income tax.

Don't get me wrong, GE is a great company. And I am one of those who believe that if we want to maximize the long-term well being of our country the correct corporate income tax rate is zero. But one has to wonder what kind of unnatural acts GE had to perform on its business to not only zero out its tax obligation but to stick out its hand and ask you and me for a check.

Leveling the playing field by setting the corporate income tax rate to a revenue neutral 23% - or even better, a growth friendly 12% - while wiping the slate clean of all special interest deductions would have an immediate stimulative effect, except perhaps for the lawyers and accountants that would be let go to gum up some other part of our economy. Yes, companies as skillful at tax avoidance as GE would see their tax liabilities go up. But they would be free to run their businesses for efficiency, profit, and growth. Over time smart guys like this could surely increase their net earnings enough to make up the difference.

Congressmen afraid to bite the many hands that feed them could console themselves knowing that the day after the slate is wiped clean they can resume marketing tax breaks to their corporate buddies. Like returning barnacles, these will take some time to accumulate before the whole process has to be repeated.