Happy Tax Day, USA (April 18, 2016): How are corporations and individuals footing the tax bill?

© 2016 Prof. Farok J. Contractor, Rutgers University

Corporations & Obama Cartoon

SourceThe Economist, April 9, 2016

Individual Americans will finish filing their returns on April 18, 2016, contributing approximately $3.1 trillion in income and social insurance (Social Security and Medicare) taxes to the highest federal government revenue of any nation on earth. But the US government will spend at least $500 billion more than it collects, adding to a National Debt that will cross $19 trillion this fiscal year.[1]

The figures have become so astronomical that the average American’s mind cannot encompass the magnitude involved—eyes and minds glaze over when contemplating it. Yet a groundswell of inchoate anger is rising from both the political left and right because of a feeling of unfairness. Both blame companies, albeit in different ways.

On the left, Bernie Sanders argues that companies squeeze wages, pay top executives immense salaries, and—especially multinational corporations—take advantage of loopholes that effectively reduce their tax payments. On the right, Donald Trump lambastes corporations that outsource jobs away from the US and criticizes imports that reduce economic activity here. Like other Republicans—and citizens — he also says that taxes are too high.

Federal Taxes as Percentage of US GDP_Table
SourceTax Policy Center

What are the facts?

Overall US tax revenue as a percentage of GDP has not changed since 1970, and at around 18 percent, this is well below the percentages in other major developed nations, such as Germany, Japan, and France.

However, three substantial changes have occurred since the mid-twentieth century:

1)     Social insurance taxes have escalated one-and-a-half times because of

o    An aging population (declining ratio of working taxpayers to retirees) that wields increasing lobbying clout through organizations like the American Association of Retired Persons (AARP); and

o    Out-of-control healthcare costs because of a medical and lobbying establishment that reduces competition among providers. (According to the World Bank, only Tuvalu and the Marshall Islands  spend similar percentages on healthcare as the US [at 17 percent] compared with the UK’s or Spain’s 9 percent, Germany’s 11 percent, and Canada’s 10 percent.)[2]

2)     Corporate tax contribution to the federal budget has fallen precipitously

o    To one-third of its level in 1952, according to CNN-Money calculations (see below), and

o    To two-thirds of its level since 1970 (see table above).

3)     Individual tax contributions (income + social insurance) to the federal budget have increased from 51.9 percent in 1952 to 80.0 percent in 2015.

  Who Pays US Taxes_Figure
Source: U.S. tax revenues at record high. Who’s paying? Heather Long, August 14, 2015. CNN-Money.

What’s to blame? Two overarching facts

Two uncomfortable facts emerge on dispassionate analysis: (1) The US government’s spending has hugely escalated, and (2) at the same time the proportion of the burden shouldered by corporations has sharply reduced over the years.

Corporations say that the US corporate tax rate, which maxes out at 35 percent, is among the highest in the world. But they admit that they effectively pay much less—only because they are taking advantage of loopholes legislated by Congress. (See my blog posts of April 12, 2016, Inversions…and Versions (of Tax Truths), and October 9, 2015, International Tax Avoidance: Clarifying Multinational Company Tax Issues.)

For example, under US tax law passed by Congress over a quarter of a century ago, the US tax on multinational company foreign subsidiary profits may be deferred indefinitely—i.e., can be forgiven forever—by the simple expedient of not repatriating the money back home to the US. (The funds sit outside the US, parked in tax havens like Bermuda or reinvested in other foreign operations.) The accumulated, but un-repatriated, profits of American multinationals’ foreign subsidiaries—that have legally escaped US taxation—have been variously estimated as between $2.1 and $ 3 trillion dollars.[3]

The corporate position—although seldom voiced so boldly—is that if such tax loopholes exist, it is the company’s fiduciary duty to shareholders to take every advantage of existing loopholes to legally avoid taxes. If we buy that argument, then the debate over corporate responsibility ends right there.

But does it? Yet another perspective is that corporations themselves, or through their Washington, DC lobbyists, influence (and in some cases even draft the wording of) bills in Congress. From this perspective, the focus of attention and reform should not be on corporations, per se, but on the role of lobbyists, money, and political influence in Washington, DC. Corporate America is said to spend over $3 billion a year on lobbying,[4] and the total amount spent on influence is well above $6 billion.

Happy tax day

Dear readers, as you file your tax returns, think of these underlying issues: What is corporate responsibility? What constitutes an acceptable balance between individuals and corporations in supporting their government? What is congressional responsibility? Think of the American political process that concentrates power and money in the US capital. Is it a coincidence, by the way, that out of the 3,007 counties in the US, the top ten—by median income—are counties surrounding Washington, D.C. in its suburbs?[5] Hmmm…

[1] See the Congressional Budget Office.
[2] See the World Bank Data.
[3] See U.S. Companies Bring More Foreign Profit Home—About $300 billion earned abroad was repatriated, or flagged for repatriation, last year. Vipal Monga, March 23, 2015,  Wall Street Journal; and Sanders: U.S. multinationals would owe $620 billion on overseas profits. Jon Greenberg, Monday, April 11, 2016, PolitiFact.
[4] The Economist, April 9, 2016, Open warfare breaks out between the White House and America’s tax-shy multinationals.
[5] See Scott Walker says most of the 10 richest counties are around Washington, D.C. Tom Kertscher, March 2, 2015, PolitiFact Wisconsin.

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