Another Case Study for Corporate Tax Reform

A New York Times analysis shows how corporate tax reform is desperately needed.

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Extreme close up of young woman's hand holding pen near US tax form

Pete Sepp is Executive Vice President for the 362,000-member National Taxpayers Union (ntu.org), a nonpartisan citizen group working for lower taxes and limited government at all levels.

Given that the tax code and its accompanying regulations are about 25 times the length of "War and Peace," it's no wonder Americans are clamoring for simplification of the laws. The recent Internal Revenue Service scandal has only added to the public outcry over a tax system that is arbitrary and susceptible to political manipulation. Some lawmakers seem to be responding in earnest, as the House Ways and Means Committee continues to craft a tax law overhaul.

If elected officials needed any more evidence that their work is vital, they need only consult a recent New York Times feature on corporate taxes. Utilizing data from S&P Capital IQ, the Times constructed an infographic plotting the total average effective tax rate from 2007 to 2012 – local, state, federal and international combined, after credits and deductions – of companies on the Standard & Poor's 500 index. Though the Times' analysis was skewed in spots, the numbers themselves ought to dispel many myths about "tax fairness" perpetuated by members of the Washington establishment.

According to the data, the effective tax rate for the S&P index as a whole was 29.1 percent. However, the details show huge differences among industries and individual firms. Pure "industrials" – which include firms like United Technologies and Caterpillar – paid an average rate of 24 percent, while financial companies came in at an average of 33 percent. One instance of variation within a category was "materials" (e.g., chemicals and minerals), where rates paid among major firms could vary by 20 percentage points. 

[ See a collection of political cartoons on the economy.]

Meanwhile, Apple – which came under scrutiny last month during Congressional hearings – managed to pay a relatively lower rate of 14 percent during the period studied. But as the Washington Examiner's Tim Carney deftly noted, this is a reason to pile on the criticism against Apple's accusers, not Apple itself:

The company moved money around to minimize the tax it owed and then paid the amount the law required. Apple didn't write the tax law or even lobby very hard to shape it. And that's just the problem. The grilling of Apple is best understood as a shakedown by politicians upset with Apple for not playing the Washington game that yields contributions, power, and personal wealth for congressmen and their aides.

Speaking of politicians, the most interesting upshot from the Times analysis – one this author has repeatedly examined – is the average tax rate for the energy industry of 37 percent, much higher than the overall S&P mark. In fact, "Big Oil," often excoriated on Capitol Hill for paying too little in taxes, shelled out huge sums to governments. America's three largest energy firms paid well above the average in their effective rates – 37 percent (Exxon Mobil), 39 percent (Chevron), and 74 percent (ConocoPhillips). They also paid the most money of any companies in absolute terms ($289.7 billion combined from 2007 to 2012). 

[ See a collection of political cartoons on energy policy.]

Incredibly, the Obama administration and its allies in Congress think this is not enough. They seek to take away provisions such as the Section 199 manufacturers' deduction – widely available to many other industries – but only from certain oil and gas companies. Equally incredible (and ironic) was the rate for Berkshire Hathaway, the investment firm led by Warren Buffett, who is constantly agitating for higher tax burdens on those he defines as too wealthy. Berkshire Hathaway paid an average rate of 23 percent, some six points below the overall S&P level. So much for his sermons about "tax fairness."

All of these statistics illustrate a point: while Warren Buffett & Co. look up and down the income scale in their finger-pointing exercises, and "Big Oil" comes under attack, policymakers ought to be looking sideways instead. Of course, a firm's circumstances (such as taking a large debt write-off) in any given year may result in a lower or higher than normal tax burden. However, the most efficient tax systems at least strive for "lateral fairness" – meaning, companies with about the same amount of profit generally pay about the same amount of tax. America's structure doesn't come close to this ideal.

And it is this lateral fairness thicket that snarls our economy in many ways. As my organization's annual Taxing Trend study of tax complexity reported, Americans spent 6.7 billion hours complying with the Treasury Department's paperwork burden, almost all of which is the result of federal personal and corporate income taxes. Converting this time into a slightly more fathomable figure, it's equal to roughly 3.35 million employees working 40-hour weeks for a whole year (with two weeks' vacation).

[ Check out our editorial cartoons on President Obama.]

But particularly relevant is how this hypothetical "workforce" stacks up against some of the industrial sectors described above. It would, for example, exceed the number of workers at Wal-Mart Stores, McDonald's, Target and Kroger combined. These just happen to be the four biggest retailers in the Fortune 500. Alternatively, 3.35 million is more than triple the number of employees at the nation's top four banks: Bank of America Corp., Wells Fargo, Citigroup, and J.P. Morgan Chase & Co.

With this perspective, it is easier to understand why the act of filing taxes represents a significant cost over and above the act of paying taxes. Imagine the entire workforces of the firms named above, toiling not to offer affordable retail goods, or feed a hungry nation, or provide financial services to millions of households, but instead filling out tax forms, looking up tax-law references and keeping records for the IRS. Imagine no longer: between out-of-pocket costs for software and other tax-compliance needs and the compensation value of those 6.7 billion hours, the total cost of the Treasury's burden on Americans is $240.8 billion a year.

These are but a few measures of the economic "deadweight losses" attributable largely to our uncompetitive tax system. It would be a shame if Congress and the White House squandered their latest opportunity to replace the current mess with a simpler, stable alternative by singling out certain industries or groups of taxpayers for punitive treatment. When it comes to tax reform, politics must not be allowed to win over economics (and common sense) again.