Probably the greatest structural problem in American public policy today is the fact that the U.S government spends about 22% of GDP, but only raises about 18% of GDP in taxes. Even if you don’t believe in an expansion of government services are necessary to repair huge holes in our national safety net (universal health care, ending poverty, providing full employment, etc.), that gap is what’s producing our Federal debt increase, which is going to catch up with us. However, the irony of public policy is that the facts are ultimately less important than the narrative we construct around them. That gap could be explained either as an austerity narrative that the problem we have is a “government that’s living beyond its means,” (and hence needs to be massively downsized) or as a progressive narrative that the problem really is a “structural revenue shortfall” that needs to be addressed with increased taxes – and both narratives would be broadly correct. The real fight is over the political values that inform them – whether we as a society value the goods and services the government provides more than we mind the cost of the taxes that pay for them.
At the same time, there are certain facts that are important – especially when the austerity narrative elides them to make the argument that the state’s lack of fiscal capacity and the impossibility of squeezing more money out of the rich means that our solutions have to come in the form of cutting benefits like Social Security and Medicare, as well as limiting eligibility. The state has a much greater fiscal capacity than has been thought (that’s one lesson that we can draw from the tax cuts, Medicare Part D, and the wars in Iraq and Afghanistan). It also has more options than regressive taxation and regressive spending cuts. In part 1 of this series, I laid out how a modest progressive shift in taxation could raise an additional $297 billion a year. That’s 2% of GDP – or half the gap between Federal spending and Federal outlay.
In this part, I’m going to show how we get the other half by ending regressive tax expenditures (AKA corporate welfare).
John Rawls famously described justice as fairness. At the highest level, he argued that justice required the equal liberty principle (i.e, that everyone should have as much freedom as compatible with an equal share of freedom for everyone else), fair equality of opportunity (i.e, that competition for positions and resources that results in inequality should take place in conditions that give people from different social backgrounds an even shot), and the difference principle (i.e, that any inequalities that do result are only justified if they benefit the least advantaged). On a more prosaic level, there is a strong sense in which consistent and equitable rules are important elements of justice – the right to due process (so that everyone gets the same procedural treatment, under rules that everyone knows how to follow and has agreed upon in advance) and the right to equal protection of the law (so that the rules cover everyone without exceptions) are cornerstones of our civil rights tradition for a reason.
Arguably the same thing is true for tax policy. In addition to the progressive principle, that people should contribute to the cost of public goods and services in proportion to their ability to pay, there is also the principle that people making the same amount of money should be treated the same way – or at least if there are divergences, that those divergences are transparent, agreed upon in advance, and don’t bend too far from the statutory rate. Yet we can see from the chart below that the American tax system as it is experienced is very different from what it looks like from an abstract examination of statutory rates.
I doubt that John Rawls would be particularly happy with this setup. While it’s encouraging to see that we’ve moved to a de facto negative income tax for the poorest Americans (thanks to the EITC and the Child Care Tax Credit and similar tax expenditures), there’s a lot of divergence here that doesn’t fall under the difference principle. People in the top 1% shouldn’t get to choose whether they pay 26.9% or a tenth of that; people in the top 20% shouldn’t get to choose between 18.6% or a fifth of that. It’s also troubling to see that the amount of divergence is much higher at the top then it is in the middle.
When people of a certain income are supposed to pay at a certain rate, a cut for some people at that income level and not for others needs some justification. In some cases, these divergences are based on public purposes that have a fair degree of public support – tax credits for families with children, or tax credits that help people buy their own homes, for example. Yet in other cases, these swings in tax incidence are based on extremely arcane and opaque provisions that don’t have public awareness, let alone support.
And nowhere is this more true than in corporate taxation.
Practice – Closing the Loops:
In discussions of America’s “system of free enterprise,” it’s unsurprising how little we talk about the huge amount of money that the government gives to businesses, both in the form of subsidies and preferential treatment on their taxes. And while public outrage often focuses on the gaudy details of a dodgy earmark or a padded government contract, it’s actually the most banal items where the biggest ripoffs occur.
Transnational Corporate Income Tax:
Multinational corporations, whether they’re headquartered in the U.S or abroad, love to play a game with their income taxes where one part of the corporation sells goods to another part at a loss and then claims that loss in the jurisdiction where tax rates are high so that they can write off that loss on their taxes, and have other parts sell goods to other parts at a huge markup, collecting the profit in a jurisdiction where taxes are lower. As a result, many corporations (including 37% of U.S multinationals and 71% of foreign transnationals) can reduce their tax liability to nothing; Byron Dorgan, no flaming liberal, has estimated that $53 billion dollars a year are lost to these dodges.
Establishing a unitary method of taxation, where corporate income taxes are calculated based on the proportion of a company’s sales, assets and payroll are in the U.S, would prevent that dodge. Similarly, closing offshoring loopholes that allow corporations to shove their assets into banks in the Caymans or Switzerland would raise another $70 billion a year in taxes that are rightfully owed.
One of the major reasons why corporate tax incidence is so much lower than the actual corporate taxes has to do with one of the most boring things imaginable – depreciation of capital assets. When corporations buy buildings, or land, or machinery or the like, those assets have a value that goes down over time through the normal process of wear and tear and obsolescence. In the past, it’s been U.S practice to give corporations a tax deduction on those assets so that a company with a 10-year old computer system isn’t paying the same rate as a company with a brand-new computer system.
However, in the last thirty years, one of the favorite ways that politicians have done favors for corporations is to allow them to take their tax deductions up front, and get them faster than the assets are actually wearing out. It’s a rather sneaky way of essentially loaning corporations public money without saying that’s what you’re doing. It gets really crazy, as corporations can lease equipment and the like to another corporation in return for that company’s accelerated depreciation credits, allowing them to claim the credit twice on the same piece of machinery. According to Mark Zepezauer, author of “Take the Rich Off Welfare,” these kinds of shenanigans rake off about $85 billion a year in tax credits.
Finally there are a series of smaller loopholes that collectively add up to some serious money. Corporate-owned life insurance taken out on their employees – the “dead peasants insurance” made infamous by Michael Moore’s newest movie – is tax free. Insurance companies have a number of dodges – smaller insurance companies are tax-exempt, money set aside as reserves are tax free, and so on. Collectively, this works out to $23.5 billion a year in tax credits. Business meals and entertainment – which apply to executive’s fancy lunches but not factory workers’ lunch pails – are 80% deductible – working out to another $8.8 billion a year that solely goes to management.
Added all up, that comes to $240 billion a year. For reference’s sake, that’s about 2.5 health care reform bills, or the entire yearly Federal outlay on Medicaid that’s handed out to corporations in a fashion that’s extremely opaque, incredibly inequitable between big businesses that can afford to splash out for lobbyists and political donations and small businesses that can’t (to say nothing of the differential treatment between businesses and individual incomes), and that has very little if any basis in public purpose. These aren’t economy-wide tax policies that promote economic growth, they’re the purest case of special interest politics.
Taken together, that gives us another 1.7% of GDP, which means that the structural revenue shortfall is now virtually closed between this and a mild progressivization of taxes. The lesson here is that we shouldn’t ever underestimate the fiscal capacity of a well-organized developed nation. Certainly corporations and conservatives don’t.