January 27, 2011

Corporate Tax Code Proves Hard to Change

By BINYAMIN APPELBAUM

WASHINGTON — Large trucking companies paid the government more than 30 percent of their income in 2009. Biotechnology companies paid less than 5 percent.
Such yawning gaps among industries have become a defining feature of the nation’s corporate tax code, an unwieldy accretion of rules and exceptions that amount to a reward for some kinds of businesses and a rebuke for others.
President Obama on Tuesday added his name to the long list of politicians who have called for an overhaul of those rules, so that companies of all kinds pay the federal government a roughly equal share of their annual profits.
“It makes no sense and it has to change,” Mr. Obama said in his State of the Union address. “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.”
But recent efforts to rationalize the code all have failed, and some members of both parties express skepticism that this time would be different. The problem, in a nutshell, is that the popular step of lowering taxes for industries like trucking requires the unpopular step of raising taxes for industries like biotech.
The very idea already is drawing howls from the corporate sector.
Moreover, many of the individual exceptions that allow corporations to shield profits from taxation actually enjoy broad popularity, like tax breaks to support domestic manufacturing, low-income housing and green energy.
There is also the chance of political gridlock. Senate Democrats and House Republicans both are holding hearings on tax reform. Both declare the subject a priority. But it is hardly clear that the two parties are talking about the same thing.
Many conservatives want Congress to cut the overall amount collected from corporations to spur economic growth.
Representative Paul D. Ryan, the Wisconsin Republican who gave the party’s response to the president’s State of the Union address Tuesday night, has proposed eliminating the corporate income tax. Mr. Ryan instead would impose a smaller, 8.5 percent tax on business “consumption” — a measure of income that excludes investment, meaning that the government would collect a much smaller share of a much smaller tax base.
Many liberal groups, meanwhile, see increasing corporate taxation by closing loopholes as a relatively painless way to reduce the federal deficit.
“It doesn’t make a lot of sense to say that we’re going to close loopholes and then give all the money back to corporations,” said Steve Wamhoff of Citizens for Tax Justice, a nonprofit group that favors increased corporate taxation. “This would be one deficit reduction measure that would get the most support from the public.”
The United States imposes a top corporate tax rate of 35 percent. It is almost entirely a theoretical exercise. Various government and private studies have found that the average corporation generally pays about 25 percent of its income, thanks to a mix of deductions and ever-more-sophisticated tax avoidance strategies.
Google, saluted by the president Tuesday as a paragon of American innovation, paid the government 22 percent of its income in 2009, according to its reports. The company reduced its tax bill by more than $1 billion, claiming deductions for research and investment and exploiting a popular corporate strategy by routing a large share of its income through Ireland.
Even more striking are the differences among industries. Aswath Damodaran, a finance professor at New York University who has researched the issue, said that young high-tech companies often pay less than 10 percent of income in taxes, while old-line firms like railroads and utilities often pay more than 25 percent.
This inequality is one of the administration’s major arguments for tax reform. But the idea is widely supported by economists and other academics for a different reason — the concern that the current rules encourage companies to make bad choices.
The ability to deduct interest payments, for example, leads companies to borrow more money than they need. The rules governing real estate have long spurred new construction that would not be profitable without tax benefits.
“The tax code makes bad investments into good ones,” Mr. Damodaran said. “Changing the tax code is going to create economically better decisions.”
A major stumbling block is that Congress — often at the urging of presidents including Mr. Obama — has regularly tinkered with the tax code to effect policies.
The president on Tuesday charged that “a parade of lobbyists has rigged the tax code to benefit particular companies and industries.”
But the single largest loophole in the corporate tax code was the government’s idea. It exempts from taxation the money that companies spend on health care for their employees, costing roughly $175 billion each year in lost taxes. A deduction to encourage domestic manufacturing costs $14 billion. A deduction for investment in low-income housing costs $6 billion.
There are some signs that Congress is willing to rethink its ways. Senator Max Baucus, the Montana Democrat who leads the Finance Committee, has been influenced in his thinking by conversations with corporate leaders who told him they would prefer the certainty of a lower tax rate to the uncertain application of various deductions.
Mr. Baucus is now holding a series of hearings on the tax code, beginning with a history of past efforts at reform, emulating the methodical approach he employed in helping to construct last year’s healthcare legislation.
Senator Orrin G. Hatch, the ranking Republican on the Finance Committee, said after the State of the Union address that he believed the entire tax code should be cleaned up — in part because many small businesses actually are taxed as individuals.
“The president is right that our nation’s corporate tax rate, the second highest in the world, is an impediment to economic growth and a significant drag on our economic competitiveness,” Mr. Hatch said in a statement.
Representative Dave Camp, the Michigan Republican who is chairman of the House Ways and Means Committee, is planning a series of hearings on broader tax reform starting Thursday.
But in a sign of the disagreements lurking just beneath the surface, Mr. Camp emphasized that his hearing was focused in part on reducing “the cost burdens of the current code.”
He described the president’s proposals as “a few token gestures.”