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Incumbent Congress Worried about Tax Reform Issue as Midterm Elections Approach

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Earlier this summer, The New York Times featured an outstanding article by David Leonhardt concerning the American corporate tax system and the potential for its reform in the coming years. One of the arguments in the article is the amazing variation in the corporate tax rates for businesses in different sectors. For instance, those with particularly mobile goods, such as concentrate to make soda, can quickly shift operations to low-tax jurisdictions. Those with intangible goods such as software application production can structure their accounting so that profits are reported in low-tax jurisdictions.

According to research from financial study company S&P Capital IQ (and discussed by the New York Times),disclosed the overall tax rate (consisting of federal, state, local, and foreign taxes) of the following corporations are: Amazon.com, 6 percent; Boeing, 7 percent; Apple, 14 percent; General Electric, 16 percent; Google, 17 percent; eBay, 19 percent; and FedEx, 23 percent. These tax rates are astoundingly low considering that the nominal U.S. corporate tax rate is 35 percent, which does not take into account regional or local taxes.

However, companies with brick-and-mortar operations, frequently merchants, pay higher total tax rates: Wal-Mart, 31 percent; CVS, Best Buy, the Gap, and Whole Foods all ended up with tax rates between 35 and 40 percent. Exxon Mobil, due mostly to tough foreign taxes, paid 37 percent. Small companies that don't have worldwide operations are unable to get an advantageous tax rate by transmitting profits to a low-tax jurisdiction, although they can of course choose to integrate in a specific U.S. state to reduce taxes.

The trouble with the variance in what is supposed to be be an invariable corporate tax rate is that the tax code is pretty much selecting winners and losers rather than leaving that choice to the free market. There are really no reasons for why the makers of soft drinks ought to pay less taxes than the seller of soft drink. There is significant consensus across the political spectrum that the nominal corporate tax rate ought to be lowered (perhaps to 25 percent) and particular deductions and tax credits eliminated; although, whether that change must be revenue-neutral is the topic of heated debate.

While both parties support tax code reform amongst congressional leaders, business lobbyists could ultimately make matters worse. For example, a group of companies called "Let's Invest for Tomorrow (LIFT)", which includes recognizable names like Caterpillar, Coca-Cola, and Proctor & Gamble, decides to move the U.S. to a "territorial" tax system. Under this system, the U.S. would only tax the part of a company's income that is received directly from U.S. operations. Under the present "worldwide" method of taxation, the U.S. imposes tax law on U.S.-based businesses on their worldwide income but will grant them credit for taxes paid to overseas governments.

The problem with LIFT's proposition is that it enables large entities to easily move their operations to low-tax foreign locations, while smaller sized U.S. companies pay greater rates. Of course, sound points can be made for lower tax rates, but it is antithetical to progressive taxation to tax large, U.S.-based international companies at lower rates than smaller ones with specifically domestic operations, particularly when international businesses heavily count on advantages offered by the United States (a court system with well-known legal precedents and a huge, regulated protections market, for example). The article notes that a compromise may be possible; the U.S. could potentially enforce a territorial system but enforce a minimum tax on any company in the United States. So if a U.S.-based soda-maker relocates their operation to another country and pays a 3% tax rate, the U.S. can enforce a tax on the business's revenues to the point that it is taxed a predetermined minimum rate (for instance, 15 percent) on its international numbers. Policymakers have mentioned that reform might be a crucial part of 2014's agenda.
About author: Frank Stafford

Frank Stafford is a graduate of the SMU business school, and a proud fan of Mustang football. With his business expertise, Frank writes for several legal professionals in Dallas, including TBA Attorney Joe B. Garza. In addition, Frank Stafford is the Editor and Lead contributor to TheCapitalPress.com. You can see some of Frank's published press release work here: Davidson Court Has a Cow over Bad Estate Planning.

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