Get Ready for the Next Assault on Corporate Profits

ABC News, by way of the Associated Press, is reporting that “most” US corporations, and foreign corporations doing business in the US, paid no income taxes between 1998 and 2005.

What reportedly happened is that Senators Dorgan (D-ND) and Levin (D-MI) went to the Government Accountability Office (GAO) and asked them to find them a stick to hit business over the head with.

Supposedly, this report is going to be published today, but as I write, it hasn’t yet appeared on the GAO web site. Dorgan’s page at senate.gov has nothing to say about it.

So obviously we’ll want to revisit this when the actual report comes out, but in the meantime the news spin (which more than likely was the point of the exercise) is already out. And it’s worth responding to.

The short answer is: How stupid do you think we are, Senators Dorgan and Levin?

Here’s what Dorgan had to say: “It’s shameful that so many corporations make big profits and pay nothing to support our country.”

Ok, so it’s shameful. Now that we know where you’re coming from, Senator, let’s take a closer look.

According to the (still unreleased) GAO report, some 1.2 million business corporations paid no federal income tax. They account for about $2.5 trillion in revenues.

That’s revenues. Not profits. You don’t pay taxes if you don’t make any money. And we’re talking about less than one-fifth of all the business revenue in the country. The other four-fifths of business sales are profitable, and most certainly pay federal taxes.

The news reporting is admitting that GAO didn’t bother to ask the simple question: why aren’t these companies paying any federal taxes? Well, of course not, since that would have dampened the headline value, which is intended to make you, dear Reader, think that businesses are ripping you off.

As far as paying something to support the country: Senator Dorgan, what do you think about all the people who are being paid salaries to work for all those unprofitable or marginally-profitable corporations? Don’t they pay income and payroll taxes? I can tell you, as a guy who signs paychecks every two weeks, that labor costs are a big part of the reason why it’s hard for businesses to make a profit.

Income and payroll taxes paid by individuals are where the vast majority of Federal revenue comes from, after all. That’s not good enough for you, is it, Senator Dorgan?

Let’s ask the question that the GAO didn’t bother to: why don’t corporations pay taxes? Because some of them aren’t profitable every single year.

And even when businesses are profitable (and thus pay Federal income taxes), the numbers aren’t large. In many years, the total Federal income tax paid by corporations amounts to a smaller number than the Federal budget deficit alone.

And that’s rational too. Why would you contrive to be highly profitable as a C corporation, when your income will be taxed twice? First at the corporate level, and again as ordinary income when it’s paid out to shareholders?

No wonder the managers of American corporations are paid by their shareholders not to deliver high profitability, but rather steady profitability with high growth rates. It’s because the tax code distorts their incentives.

John McCain has proposed to reduce the corporate income tax rate from 35% (one of the highest in the world) to 25%. It’s a start, but the rate should be no more than 5%.

Let’s take care of two of the obvious objections here: corporate welfare, and income shifting.

Yes, corporate welfare is real. There are plenty of very large businesses who lobby their way into getting exceptions, exemptions, special tax treatment of certain assets and income, forbearance of regulatory activity, and many other goodies. All of that falls into the realm of government distorting free-market incentives for the purpose of accomplishing some social goal.

When you look really hard at those items (and how about asking the GAO to do so?), a lot of the “social goals” that are addressed by corporate welfare, are to direct spending to particular states and Congressional districts. How about that, Senator Dorgan? How about you set a good example and remove all the special tax treatment for any business that operates in North Dakota?

Income shifting: this is hard to measure, but there probably is a certain amount of “shifting” of profits between the subsidiaries of large corporations that either have a non-US domicile or have foreign operations.

It’s not kosher, it’s not legal, and I’m most definitely not excusing it, but if and when it happens, the intent is to recognize revenue in the lowest-cost tax jurisdiction. So rather than go to ABC News to get a cheap headline, Senator Dorgan, how about this instead:

How about you call up your colleagues in the House and ask them to reduce the corporate tax rate, as Senator McCain has proposed? Reduce it at the very least to the world average, if not well below. That way, if there is significant income shifting, it’ll get shifted here rather than somewhere else.

And while we’re at it, let me tell you what really honks me off: why are US Senators spending my money to request GAO reports that contain garbage analyses of what anyone with two eyes and a brain already knows?

-Francis Cianfrocca