by David Soll
Z magazine, June 2002
In the past year President Bush proposed, and Congress approved,
a $1.6 trillion tax cut that reduced rates for most taxpayers
and made some significant structural changes, including eliminating
the estate tax. Corporate America felt left out when the President
rammed his tax cut through Congress. "Where's our tax cut,"
it asked? "Be patient," responded the Bush administration.
As it turns out, corporate America had to wait only a few
months for its tax cut. As part of the economic stimulus package
passed by Congress in mid-March, businesses were granted accelerated
depreciation of new purchases. Depreciation may be an abstraction
to most Americans, but the tax break will reduce corporate taxes
by $43 billion this year.
Media coverage of the economic stimulus package focused on
how the bill had been significantly pared down from the one first
offered by House Republicans, which contained hundreds of billions
in corporate tax breaks. The mainstream media treated the original
measure with surprising disdain, delighting in reporting the billions
in refunds the bill would have provided to some of America's wealthiest
corporations. However, once the Senate refused to grant large
corporate tax breaks and House Republicans were forced to remove
them from the bill, the media's interest in corporate taxes waned.
Had they continued to investigate, the media would have discovered
that although House Republicans largely failed in their battle
to significantly slash corporate taxes (though $43 billion is
hardly pocket change), advocates of reduced corporate tax rates
have been winning the war for 30 years.
According to the IRS, in 1971, corporations paid 23 percent
of income taxes collected by the federal government. By the year
2000, the corporate share of taxes had fallen to 17 percent. This
reduction may seem relatively minor unless we appreciate that
individual taxpayers were required to fill the gap left by the
effective decrease in corporate tax rates. If corporations had
paid 23 percent of the income taxes collected in 2000, as they
did in 1971, the federal government could have distributed an
average rebate of $628 per tax filer at no net loss of revenue.
Corporations are able to avoid paying the 35 percent tax on
profits called for under the law by taking advantage of thousands
of loopholes. According to a study conducted by the Institute
on Taxation and Economic Policy, 250 of America's largest corporations
paid an average tax rate of 20.1 percent in 1998. Many of these
corporations, including Texaco, Enron, and Goodyear actually received
rebates from the federal government. Indeed, one of the most striking
aspects of corporate taxes is the disparate treatment received
by different industries. While some industries, such as publishing
and health care, pay close to the standard 35 percent rate on
profits, the petroleum and forest products industries pay only
10- 15 percent of their profits in taxes.
Congress, eager to appease corporate contributors, has largely
ignored the issue of corporate tax avoidance. However, in the
wake J of the Enron scandal, a bill has been introduced in the
Senate that would limit the ability of corporations to reduce
their tax liability by granting employee stock options. Currently,
corporations count stock options as expenses for tax purposes,
thereby reducing their taxes, but often fail to include the value
of options granted when reporting profits. Corporations are thus
able to overstate profits, driving up their stock price, all the
while limiting their tax liability.
Corporate America has banded together to fight for continued
preferential tax treatment of stock options. Given corporate opposition
and a House of Representatives that showered corporate America
with billions in tax rebates, tax treatment of options isn't likely
to change anytime soon. However, it's worth bearing in mind that
options represent only one of numerous tax loopholes corporations
can exploit to reduce their tax burden. Instead of focusing on
options, Congress could adopt a more comprehensive approach that
would establish a true mandatory minimum tax rate that corporations
would have to pay under all circumstances.
Specifically, Congress should strengthen the Alternative Minimum
Tax (AMT) on corporations. Congress established the AMT in the
1986 Tax Reform Act to ensure that profitable corporations pay
at least some federal income tax. The share of income taxes paid
by corporations increased after 1986. However, laws passed in
the 1990s weakened the AMT, resulting u~ lower effective corporate
tax rates. The AMT has been eviscerated to the point where many
large corporations routinely receive tax rebates from the federal
Congress should require that corporations pay at least 20
percent of their profits in taxes. This would effectively limit
the extent to which corporations could take advantage of deductions,
thereby restoring a measure of fairness to a system which favors
some industries over others and corporations over individual taxpayers.
In the buildup to April 15, mainstream newspapers often publish
a stream of articles related to federal taxes. This year, many
of those articles focused on the fact that the IRS audits low-income
Americans, specifically those who receive the Earned Income Tax
Credit, much more frequently than it does wealthy Americans.
Citizens should insist that Congress address the more fundamental
issue of corporate tax avoidance. Creating an enforceable minimum
corporate tax rate of 20 percent of profits would generate tens
of billions of dollars for the U.S. Treasury. Doing so would send
a signal to corporate America that playing by the rules involves
more than just reforming accounting practices.