Why Congress will never fix the corporate tax system …

It’s true that the U.S. has one of the highest, if not the highest, corporate tax rates in the world. 

Critics claim this is driving U.S. companies to merge with companies abroad to avoid those high U.S. taxes. They say that if Congress would simply lower our corporate tax rates to a reasonable level – or eliminate them altogether – U.S. companies would bring more of their overseas earnings home, invest more in our own economy, and we’d probably attract more foreign investment as well.

This could boost our domestic economy, reduce unemployment, and result in even more money flowing to the Treasury than the current taxes bring in. 

The critics may be right. But Congress in never going to propose, much less pass, serious reforms to our corporate tax code. 

First, almost no major U.S. corporation pays those high taxes. They avoid paying high taxes legally, using the laws and regulations on the books already. If their management is dumb enough to be paying the top rate when they don’t have to they are too stupid to be trusted to run a lemonade stand, much less a major company. 

So a lot of the talk about the pain big U.S. corporations feel from high taxes is simply not true. What is true, however, is that our corporate tax structure is so completely, utterly screwed up that it’s not so much a question of what you owe than who you know. 

Some economists have suggested that a simple, uniformly applied corporate tax could be much, much lower than today and return much more in revenue. 

Again, they may be right. But that’s not going to happen. 

You see, the power to tax is the power to destroy. It’s also the source of power in general, particularly political power. Politicians in both parties use all the levers of the tax system to exact tribute – usually in the form of campaign funding – and to wreak havoc on the competitors of their friends. They give tax credits and tax breaks to industries and companies in their states. They place special taxes and levies on companies that compete with their states’ companies. 

And each time one politician carves out a tax advantage for one company or industry, another politician feels compelled to counter that with a special tax advantage for their competitor. 

It goes on, and on, and on. Narrow-focused exemptions and credits can be found in practically every piece of legislation passed by Congress. Some are so narrow as to be laughable – like singling out the only company engaged in manufacturing a certain product that’s defined in detail.

I seem to remember one instance where special tax treatment was written in for “companies” – actually only one fit the description – that made some arcane piece of hunting gear, like a specific type of arrow. I could be wrong, but I think that was embedded in what’s called the “Farm Bill,” but is actually the food-stamp bill because 80% of it is about funding food stamps, not helping farmers. How the arrow manufacturing exemption got included makes about as much sense. 

Anyway, that's how the tax code grows. And grows. And grows.   

Consequently, the tax code keeps getting bigger and more unfathomable all the time. Special tax breaks for one guy lead to counterbalanced tax breaks for the other guy. Companies lobby to keep their taxes low or non-existent, and to raise them on their competition. Keeping track of all the loopholes and exemptions is an industry unto itself, and companies spend millions to avoid U.S. taxes. 

Nobody benefits except corporate tax accountants, lawyers, lobbyists, and incumbent members of Congress. And I’d be hard pressed to find four more useless, self-serving groups of parasites on our economic system than these.    

Personally, I’m in favor of doing away with corporate taxes altogether, not because I own a business, but because corporate taxes are so arbitrarily applied – on purpose – they are meaningless.  

[Full-disclosure:  My business is a Subchapter S Corp.; this means all profits and losses flow directly to me and profits are taxed at my personal income tax rate. So even if Congress brought the corporate tax rate to zero, it wouldn’t make any difference to me.] 

Most major U.S. corporations making billions each year don’t pay any corporate taxes to Uncle Sam and it’s all perfectly legal. With enough money, enough smart people on your payroll, and politicians in your pocket, you can bend the system to your advantage. That’s a fact. 

In 2011 it was reported that General Electric -- a company Obama constantly praises -- paid no Federal taxes on $14 billion in 2010 profits. It used loopholes, deductions, credits for investing in low-income housing, R&D and green energy for example, and other special treatments in its 57,000-page Federal tax return to offset taxes on $5 billion in profits from U.S. operations. It reported $9 billion in profits from overseas operations that weren’t subject to U.S. taxes. 

And it was all perfectly legal.  GE certainly was not alone. If you looked, you’d find the biggest names in corporate America paid nothing, or next to nothing, in Federal taxes, year after year.  

This offends a lot of people, especially Democrats. It makes a great sound bite to rail against corporate giants not paying “their fair share.” This continues the class warfare theme we hear so often. The rich get richer and the poor get poorer because the rich – synonymous with business and business owners – don’t pay enough taxes while the poor and middle class pick up the tab.

That is, of course, complete BS. The rich pay the majority of taxes, the poor pay none, and the middle class pay just a pittance. The oft-quoted 47% pay zero Federal income taxes. 

Democrats like to cite their golden age of taxation in the 1950s when the top personal income tax rate was about 90%.  But like the 1950s, nobody pays the top Federal corporate tax rate of 35% today any more than anyone paid that top personal income tax rate back then.  The rich then, like corporations now, found completely legal ways to avoid those taxes, courtesy of their politically connected friends and smart tax accountants and lawyers.     

Now there are “corporate inversions” in the news where some companies – like Burger King– are taking heat for merging with a foreign firm simply to be taxed at a lower rate. 

Obama and his supporters think this is just wrong, unpatriotic, and on the verge of economic treason.  Democrats in Congress are trying to craft legislation to stop U.S. companies from moving offshore to escape U.S. taxes.  Republicans see an opportunity to attack the high U.S. corporate tax rate as a disincentive to economic growth. 

There’s a lot of chest-thumping going on.  And with it, a lot of hypocrisy.  (Warren Buffett, who famously claimed billionaires weren't paying enough taxes, kicked in $3 billion to help Burger King merge with a Canadian company to avoid U.S. taxes.)  

Democrats and Republicans in Congress won’t admit it, but they like the power they get from their ability to constantly tamper with Federal taxes on corporations. They aren’t going to address the fundamental problem and simply remove all the special-interest provisions they’ve put into the code that make them popular back home and with corporate lobbyists in D.C. They aren’t going to simplify the code this way – or eliminate Federal corporate taxes altogether – because they need the threat of high taxes and the promise of credits or exemptions to wring concessions from corporations.    

Much as good needs evil, yin needs yang, and other tortured metaphors, politicians in Congress can’t get their way unless they have control over both the carrot and the stick.  

Do you think any sane corporation would drop hundreds of millions of shareholder dollars on some of the green energy boondoggles if they weren’t given some tax advantage? Do you think GM would continue to take a rumored $40,000 to $70,000 hit on every Chevy Volt it sells if there wasn’t some deal to offset their losses?  Did you ever notice that anytime Congress “gets tough” with some industry, there’s a change to the tax code or credits or special deductions to help that industry comply?

And where do these deals come from?  Congress.  Because Congress is the only Federal entity with this kind of power. The House controls spending and taxes. The Senate – well I’m not entirely sure what the Senate does any more except refuse to consider legislation from the House – is supposed to approve or reject what the House proposes, in theory.      

So these weasels are always in it together. I’m sure there will be a meaningless bill proposed to halt or slow down corporate tax inversions. It will go nowhere. Just the same as Republican bills to reduce the corporate tax rate. It’s all just theater. 

Republicans rant about high corporate taxes.  Democrats rail about “corporate fat cats” and their companies not paying their fair share. But neither side will do a damn thing. Because to simplify the corporate tax code or lower rates would rob them of power. 

And in the end, it’s never about what’s good for you and me, what’s good for the economy, or what’s good for society. It’s always about the same thing.

Maintaining power.  The power to tax is the ultimate political power.