For most Americans, the most pressing economic questions involve how we can create jobs and promote economic growth. In his latest State of the Union address, President Obama highlighted a common-sense approach to addressing both issues.
Our federal tax code is replete with tax loopholes that allow corporations not to pay their fair share of taxes, and Obama correctly noted thats absurd. Reforming the code would create jobs and generate revenue that can be put toward the public investments that promote economic growth.
Each year, profitable corporations avoid paying billions of dollars in federal and state income taxes by shifting their U.S. earnings to offshore tax havens. These costly tax breaks undermine our ability to invest in the foundations of economic opportunity: an educated workforce, research and development and healthy families.
The news this week on IBM serves as a prime example. By hiding its profits in a Dutch subsidiary company, IBM is able to avoid supporting Americas business climate the very business climate that enables the corporation to thrive. Even with these huge loopholes, some people still contend that corporations should pay less.
Proponents of cutting the federal corporate income tax rate argue that the U.S. has the highest top marginal tax rate in the world. This is deeply misleading. The reality is that the effective tax rate the tax rate based on the actual amount of taxes paid that most corporations pay is nowhere near the top marginal tax rate. This is as a result, as the president highlighted, of corporations using various gimmicks to lower the amount of taxes they actually pay.
Ironically, this tax avoidance is actually bad for the corporations over the long run.
Big corporations increase their chances of remaining viable and sustainable enterprises by paying their fair share of taxes. All companies benefit from public investments: shipping goods to customers via public roads and highways, hiring employees from a skilled and educated workforce and using our legal system to protect their intellectual property and other assets. All of these benefits are supported in some fashion by tax dollars and contribute to the success and viability of business enterprises.
Closing these costly corporate tax loopholes would also work to promote greater investment in the United States. Our existing federal tax code actually rewards businesses, like IBM, that move their production to another country. These corporations are not required to pay taxes on their profits as long as they park such profits overseas indefinitely. Yet these corporations are allowed to immediately deduct the expenses incurred from building, operating and relocating new plants which reduces the amount of income subject to corporate income taxes.
While average Americans struggle, tax loopholes allow large corporations to prosper.
IBM is the largest corporation in the United States, employing 14,000 workers in its Research Triangle Park facility alone. In 2012, the company possessed $119 billion in total assets and earned $105 billion in revenues, despite a sluggish recovery from the Great Recession. If profitable corporations like IBM paid their share, this would help promote more sustainable growth for our economy.
Sen. Carl Levin of Michigan has introduced a bill the Stop Tax Haven Abuse Act that would close such corporate tax loopholes. The bill would prevent multinationals from shielding their offshore profits from taxation, raising around $200 billion in revenue over the next 10 years. Passage of this bill would provide a more balanced approach to addressing the federal deficit and would help prevent subsequent across-the-board cuts (known as sequestration) that only further inhibit economic growth in the U.S.
The Levin bill represents an opportunity to invest in Americas future and promotes the long-term success of American business. As such, it is in the best interest of all taxpayers to end costly corporate tax loopholes and for multinational corporations to pay their fair share.
Cedric Johnson is a policy analyst with the Budget & Tax Center at the N.C. Justice Center in Raleigh.