Debate over tax policy is an
obviously crucial issue because it impacts everything from various government
services like police and infrastructure and judicial system and military
funding, to having a successful educational system, and so forth.
Between the two political parties,
one area of debate which hasn’t really been brought to close scrutiny is
corporate taxation. Republicans argue that America has the highest corporate
tax rate at 39.1%, which is well above the Organization for Economic
Cooperation and Development (OECD) average of 24.1%. Democrats point out that
if you look at the effective tax rate, the largest corporations of the S&P
500 are paying effective tax rates well below that level and typically average
out to around 15%.
Essentially, due to years of
lobbying the politicians, corporate lawyers have continuously changed tax rules
to lean in favor of the largest of corporations. Transnational corporations
effectively manage a type of tax arbitrage, where profits are realized in
subsidiaries headquartered in parts of the world where the taxes are the least,
and losses are realized in subsidiaries which are located in regions where
taxes are the highest. Usage of subsidiaries with addresses in countries that
act as tax havens, like the Cayman Islands, Switzerland and Ireland, have
become a common practice. As a result, revenue to the government from the
S&P 500 companies has plummeted over the years as can be seen below:
Corporate Taxes as a Percentage of
Federal Revenue
1955 . . . 27.3%
2010 . . . 8.9%
Corporate Taxes as a Percentage of
GDP
1955 . . . 4.3%
2010 . . . 1.3%
Individual Income/Payrolls as a
Percentage of Federal Revenue
1955 . . . 58.0%
2010 . . . 81.5%
Since 2014, the above figures have
generally stayed precisely the same. In other words, as corporations paid less,
an even greater burden has been placed on individuals. About 54 of the S&P
500 corporations paid no taxes at all, with the majority getting refunds. For
example, from 2010 to 2014, General Electric (GE) made $33 billion in profits,
but paid zero in income taxes, and actually received $1.4 billion in tax
refunds over that same stretch of time.
One way companies have been
cutting their taxes is by corporate inversion, in other words, moving their
headquarters offshore to cut their taxes. There is a progressive solution which
is given the complicated name of single sales factor apportioned corporate tax.
This simply means that if a company has only X percentage of its sales in the
United States of America, it only pays taxes on X percentage of its earnings.
So if a corporation has a mere 30% of its sales in the United States, it only
pays taxes on 30% of its earnings. This was proposed by economist Michael Udell
of the District Economics Group. Unfortunately, lobbying groups for special
interests manage to succeed in allowing this concept to even be brought before
Congress.
Real estate investment trust
(REIT) structures have an effective tax rate of close to 10%, and are typically
publicly traded real estate management companies that pay-out 90% of their
taxable income as a dividend to shareholders. Supposedly, 75% of the REIT’s
assets are supposed to be real estate. Over the past decade, however, many
corporations have switched to REIT structures to cut their tax obligations. For
example, prison management companies like Correctional Corporations of America
(CXW) and GEO Group Inc. (GEO), cell phone tower management company American
Tower (AMT), document storage company Iron Mountain (IRM), and timber company
Weyerhauser (WY) avoided taxes altogether using a REIT structure, and it
appears that the railroads and power line management companies may adopt this
structure as well.
Setting aside corporations, what
about taxes on individuals? Franklin D. Roosevelt had a top tax bracket for the
rich of 91%. Of course, that isn’t 91% of all income as our tax system is a
graduated structure with brackets. In today’s dollars, every dollar made above
something like $1.4 million was taxed at 91 cents at the dollar. This tax
bracket was lowered to 70% under President Kennedy and then cut down to as low
as 28% under Ronald Reagan, and since then has been raised. What do we have
today? A top rate of 39.6% for every dollar made above $406,751, and the rich
rarely ever pay that. Most of the rich don’t have a salary that can be taxed as
income but earn their money from a portfolio of stocks and bonds.
Taxes on cash dividends used to be
taxed as ordinary income; however, that tax has been cut so those dividends are
now taxed at 15%. Taxes on corporate bonds are taxed at the ordinary income
rate, but if you put the corporate bonds into a fund or a unit investment
trust, and then have the bond’s interest payments payed out as dividends to
unit holders of that trust, you effectively lower that rate to 15%. Municipal
bonds are free of federal taxes and, depending on the bond, may be free of your
own state tax as well. Sales from long-term capital gains – stocks held more
than a year – are taxed as a rate of 15%. As a result, the rich in the top 1%
typically end up paying at an effective tax rate of 15%, which is well below
the middle class that typically ends up at a 35% tax bracket. This is why famed
investor Warren Buffet of Berkshire Hathaway (BRK.A) pointed out that his tax
rate was well below that of his own secretary.
As mentioned, in the 1980s, Reagan
cut the top tax bracket down to 28%. To make up for the decrease in government
revenue, Reagan raised the payroll tax 11 times, which amounted to the largest
tax increase on the middle class in history. He is better remembered for his
tax cuts, but those cuts only benefitted the richest in American society.
Bottom line, not only is the bulk
of the government revenue now coming from individuals, a great deal more is now
coming from the middle class than it was in the 1950s. So, we went from a
system in which the bulk of the tax burden was on capital and far less on
labor. Now we are in a system where labor is subsidizing capital.
One of the dominant economic
theories is supply side economics, which suggest that greater economic growth
is achieved if capital is not taxed and is freed up to invest in assets which
encourage job growth and grow the economy. However, historical data counters
that narrative. Through what is referred to as globalization, U.S.
multinational corporations have been investing since the 1980s in assets
offshore seeking cheaper labor costs to enhance profit. For those assets not invested,
they are hoarded in savings in other countries to the point where over $2.1
trillion of the S&P 500’s free cash is held in offshore tax havens.
The United States exhibited its
highest growth rate in the 1960s when the highest marginal tax rate was initially
at levels of 90%, 77%, and 70% throughout that decade, and far higher corporate
tax revenue was collected as well. When wealthy elites paid their fair share of
taxes, the country benefitted, and both the public and private sectors worked
in better balance. Now we appear to be in a system where there is a
distribution of wealth from the bottom 90% up to the wealthiest Americans. As a
result, the middle class is shrinking, and our infrastructure is poorly funded
and falling to disrepair. Republicans continually advocate for flat taxes,
which act as yet another tax cut for the rich and further increases the tax
burden on the middle class and the poor. Putting in place a more progressive
tax structure while eliminating loop holes would aid in growing the middle
class, and re-invigorating economic growth.
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