by Zachary Karabell Info
Zachary Karabell is President of River Twice Research and River Twice Capital. A regular commentator on CNBC and columnist for Time, he is the co-author of Sustainable Excellence: The Future of Business in a Fast-Changing World and Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends On It.
As the budget battle resumes today, one obvious fix—decreasing corporate taxes, but ending loopholes and subsidies—fights for traction. Zachary Karabell on D.C.'s latest irrationality.
Washington is entering its summer of discontent, with no resolution of the budget and debt issues that will push the federal government to the brink of insolvency in early August. Among the many divisive issues: what to do about taxes in general and corporate taxes in particular.
But where the ideological divisions over individual taxes are sharp and clear—with Republicans and Tea Partiers opposed to all increases and Democrats and the Obama administration committed to rolling back the Bush-era tax cuts on the wealthy, the lines are muddier when it comes to corporate taxes. That doesn't make resolution any easier, but given the unequivocal destructiveness of American corporate tax policy, the solution should be clear.
Put simply, American corporate tax policy manages to both undermine the attractiveness of the United States as a place to do business and undercut the ability of the federal government to collect needed revenue. The official rate stands at 35 percent. Add in state levies and it is just shy of 40 percent—the second-highest in the developed world, trailing only Japan, according the Organization for Economic Cooperation and Development. Perhaps most striking about this figure is how much higher it is than rates in countries widely derided in popular U.S. imagination as "socialist," including France, Denmark, Sweden, not to mention China.
In an increasingly dynamic and competitive world, the punitive rate of U.S. corporate taxes is a strong disincentive for multinationals to focus on the United States as a place to do business. Add in the peculiar fact that corporate profits are taxed only if they are repatriated to America, and you get one of the primary reasons why as much as $2 trillion is held outside the United States. Hence that 2004 so-called American Jobs Creation Act, which provided a brief tax holiday that allowed companies to bring those profits back to the U.S. without incurring that penalty in the hope—a false one it turned out—that they would hire more American workers.
These facts are not lost on the right. House Speaker John Boehner several weeks ago reiterated his stance, saying that, "If we want to put Americans back to work…lowering the corporate tax rate is critically important." At the same time, however, he acknowledged the validity of one of the main objections of the left: the corporate tax rate might be high, but many companies don't actually pay it.
What seems to elide both is that the United States is no longer the axis around which the global economy revolves.
Alex Brandon / AP Photo
Indeed, a Government Accountability Office study in 2008 indicated that more than half of American companies pay no federal income tax, and when benefits such as energy and agricultural subsidies are factored in, some companies are actually getting paid by the government to do business. Then there are the myriad loopholes and gimmicks—all legal within the labyrinthine tax code—that allow companies to pay significantly less, in many cases closer to 20 percent than to the stated higher rates. Even that, however, is considerably higher than elsewhere in the world.
The joint result of very high stated rates and multiple subsidies and loopholes that lower the actual rate is that companies simultaneously view the United States as an unfriendly environment to invest and do business and are able to avoid paying substantial revenue to an American government that is sorely in need of it.
The left-right dynamic in the United States has made a coherent debate well nigh impossible. The left has reacted to calls for lowering the rate—calls which have admittedly come from places such as the libertarian Cato Institute and pure right institutions such as the Heritage Foundation—as yet another giveaway to the rich and privileged. The fact that corporate titans such as Cisco's John Chambers calls the U.S. system a "dinosaur" is treated as a case in point: if corporations and the right are for something, it must be venal and wrong.
But then there is the Obama administration and Treasury Secretary Tim Geithner, who have joined the call for lowering corporate taxes. Again, on the left, that is seen as yet another indication that Obama and especially Geithner have been in the pocket of Wall Street rather than true progressives. Yet the Obama administration has married its call for lower rates with a demand that subsidies and loopholes for oil companies et al as well as tax breaks for the wealthy also come to an end. And until recently, that has met with equal opprobrium on the right.
The need to break the impasse in Washington—which will come to head in August when the government will run out of money unless the debt ceiling is raised and will continue with the fight over next year's budget—may force an unexpected and sober rationality. Democrats and Republicans, libertarians, Tea Partiers, and free-marketers may recognize that eliminating many subsidies and lowering the corporate rate gives everyone something and the country quite a lot. It would end a covert state-subsidy of big business on the one hand while also forcing Americans to end the illusion that the world will do business in the United States simply because this is America, dammit.
Yet, there are ample signs that an elegant simple solution is not in the offing. The left is determined to hold the line against anything that smacks as handouts to the rich and to corporations against a backdrop of high unemployment, stagnant wages, and the yawning gap between those doing well and those not. The right acts as if subsidies aren't really an issue and that loopholes are a natural response to unduly high rates, and views the federal government as taxing too much and spending badly.
What seems to elide both is that the United States is no longer the axis around which the global economy revolves. Corporate tax policy continues to be argued in the context of a false sense of centrality. It is an inane stance given just how dynamic and appealing much of the world has become for business and capital—and how increasingly less attractive the United States is in spite of its still vast wealth, avaricious consumers, and sophisticated economic infrastructure.
Altering the corporate tax code would be a recognition that our domestic health and international competitiveness are linked, and how we tax companies with global choices will shape the level of American affluence in the years to come. This shouldn't be an issue of ideology; it should be a question of our shared future. That would be bold and new. How sad that it appears so unlikely.
Correction: This article incorrectly described U.S. corporate tax rates as being lower, not higher, than France, Denmark, Sweden, and China.
Zachary Karabell is President of River Twice Research and River Twice Capital. A regular commentator on CNBC and columnist for Time, he is the co-author of Sustainable Excellence: The Future of Business in a Fast-Changing World and Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends On It.
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I actually think lowering the corporate tax rate, but eliminating all the loopholes, and putting in an Alternative Minimum tax for corporations would be a good thing. The current corporate rate is 35%, but few pay that much on their net profits, and many corporations (GE) pay nothing at all, even if they make billions of $$$ in net profits in the U.S.A. Regardless of where a corporation sets up it's HQ (Bahamas, etc.), the net profits they make in the U.S.A. should be subject to a minimum tax of 25%, and deductions that corporations take to ship U.S. jobs overseas should be disallowed. I also think that corporations should pay for "externalities," such as damage caused to the environment by their activities, such as pollution and/or mountain top mining. Back in the 1960s, corporate taxes represented 40% of the governments revenue. Today it's less than 15%. That has to change if we're to balance the budget, but we will have to eliminate Republicans from Congress to get it passed.
Even I know this is like saying there is a liberal-friendly Jesus!
Heres an idea,,,,, Any corp anywhere that wants to do business in the USA will pay a fair flat tax 25% on their income from the USA,,,, if they don't like it they can kiss our ass and go else where............
Hey periscope...... Just like the president's own debt commission recommendation, Paul Ryan's plan calls for lowering the corporate tax rate to 25% and closing all the tax loop holes... It's that guy sitting in the Oval Office, along with his lap dogs on The Hill, that don't want to solve the problems with our economy. And what's with the ballyhoo about "externalities"? Corporations in America already pay for polluting the environment; to the tune of millions in fines, clean up and restitution. Now I'm sure you'd like to see more fines and taxes wrung out of their hides....Hell, no surprise there, you're a liberal........... But tell me something. Why is it you didn't seek to squeeze some cash out of others that pollute? Oh say, like Barack Obama. After all the guy is responsible for polluting the air we breath when he hops his BIG jet to go on an Irish pub crawl. And let's not forget the trashing of the National Mall in Washington during his inauguration on January 20,2009. Tell our fearless leader he owes us for his gluttonous excesses and it's time he pony up and pay for his own Post-Barackalyptic Wasteland: http://www.youtube.com/watch?feature=player_embedded&v=PMrJE7J3fWU .
Eat $hit and fart rainbows. Four more years baby!
yo 3sides.... Come January 20, 2013 it will be a Republican president-elect taking the oath of office. "Obama..... One and Done" : Vote Republican / 2012 .
DISTORT, ATTACK, REPEAT Fox may look like a news broadcast, but it's really the advance guard of the GOP distortion machine. An hour-by-hour look at how Fox turns Obama into the second coming of V.I. Lenin http://www.rollingstone.com/politics/news/distort-attack-repeat-20110524 ?page=2
Hey Martha ,,,,, come look at this Utube Thingy,,,,,,,,, if its on Utube it is the Gospel!
to cryp-toadie and kog...... AP and NBC Affiliate Headline January 21, 2009: Post-Inauguration Cleanup Begins Crowds Leave Trash On Mall, Subways WASHINGTON -- Inaugural revelers are lucky they didn't get fined for littering. Read more: http://www.wbaltv.com/politics/18531400/detail.html#ixzz1NwjcnPFM .
Then why do the GOP'ers keep voting to keep the oil subsidies if they are for against as you claim?
If the Ryan Plan were really serious he would have proposed closing loop holes and leaving the tax rate alone. The reason that corporations move jobs off shore is NOT taxes but cheap labor. Get your argument straight and forget about the Ryan Plan and call it what it is the Koch Brothers' Tax Plan
So, the "flat tax" comes to corporate America? The argument that lowering corporate tax rates, but eliminating "loopholes," will result in higher federal revenues is disingenuous at best. =There's an army of lobbyists in Washington whose sole purpose is to protect the profits of their corporate clients. And, they're not going away. =So, if some corporate tax loopholes are eliminated; then, as we know from experience, new ones will be found. And, the Republicans will wage their usual relentless campaign to bring back the old tax breaks, because they "create jobs." =The grim reality is that if the corporate tax rate is lowered, even if the result is a larger federal deficit, it will remain in place--just like the "Bush tax cuts for the wealthy," the extension of which have been endorsed by our Democratic president. And, the 99% of us who aren't millonaires will be asked to pay for this enriched version of corporate welfare with even crueler cuts in the programs that benefit us and our children. =The answer? First, eliminate the tax loopholes that allow U.S. corporations like General Electric, that made $14 billion in profits in 2010, to pay no federal taxes. Then, use this increased revenue to fund the kinds of infrastructure-building/job-creating programs the country so desperately needs. =After the unemployment rate gets down below 5%, and the restoration of Clinton-era tax rates on the wealthy has brought the deficit under control, then we might revisit the idea of reducing corporate taxes. Not before.
In spirit, I agree with you. But the problem is that corporations pay less taxes in many foreign venues. We have to make it attractive enough for corporations to be a taxpsyer in the U.S.A..
We are largest economy in the world,,,, no corp is going to walk away from doing business here.... I say call their bluff....
"Presented by Xerox" That's all we have to know.
"Presented by Xerox"
My comments are being filtered. I've attempted to post numerous times calling out the corporate sponsorship of this article, and TDB just won't seem to let it through....wonder why...
Do any of these people actually understand what is happening in corporate America? Right now companies that are profitable are either selling items that predominately manufactured overseas or earn profits based on performance, which means they are making money from reducing staff. Companies that are truly hiring and creating jobs like tech start-ups aren't asking for more tax breaks, they're already receiving subsidies like incubator farms and short-term loans from local municipalities and the market is flooded with angel and VC cash. If anything these companies understand the economics of the middle class. Small businesses and start-ups grow and hire when consumers have money to put back into the economy, when they have money to pay for goods and services. If you give a fortune 500 company a tax break the money isn't put back into staffing because these companies are built on performance and outsourcing NOT additional staff overhead. The money is giving out in executive bonuses and locked in the company's coffers.
Perfect explanation, derekdj.
THANK YOU! Too bad these companies own the Republican party. Personally, I believe even before we have any budget debate there should be disclosure law enacted on any organization that has any interaction with government officials (lobbying firms, think tanks, consulting groups). I think American's should know who is paying for their representative's puppet masters like the Heritage Foundation or Carl Rove's shell companies and that economic genius Grover Norquist (you have to wonder how some one like Norquist is able to have so much control over Republicans). This is the only way for so called meat and potato Americans to understand who they elected and who is representing them. When Republicans stand in front of the podium and say "I've heard from Americans that they want medicare and education cut ...", citizens should know which Americans said that.
It's not enough to disclose who has bought our government. That will not stop them from achiving their agenda. We must take America back... fixcongressfirst.org
Excellent accept the answer would always be the same: big banks, big oil, big insurance.
Ok, logic 101. 1) The stated goal is to reduce the deficit 2) "Reforming" corporate tax rates and loophole has the goal of reducing corporate taxes so less money comes in. 3) Therefore the deficit goes up, not down. Oh, but somebody really believes that the extra money corporations keep will go to creating jobs here instead of China? Why exactly would they do that?
closing the loopholes would increase income...so that even If you lower the "tax rate" you increase effective tax revenue and more fairly. right now those with strong lobbies (GE) pay 0 tax while companies that are less powerful, smaller companies get hit with the Whole stated rate actually Reagan did that in the 80's so the wing-nuts should actually be on board...and it with other tax code "tweaks" resulted in one of the highest tax hikes ever...even though the "stated" rates were sig lower then they had been...It spread the pain about as well so smaller companies weren't stuck paying all the taxes.
addendum: my problem with Reagan (among other bad policies) is that Despite this tax hike he left us with a deficit.. unlike Clinton who raised, then lowered taxes and left us fiscally with a surplus
Lowering taxes have NEVER created any jobs just as lowering taxes do NOT trickle down. What creates jobs is a well educated, health work force that are paid a living wage. With that fantasy out of the way the Republicans should be working on how to decrease loop holes period and raising taxes on the rich. It may benefit them more in the end.
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