So, you want to eliminate tax loopholes, do you?
Be Careful What You Ask For
Here is a list of the top ten tax “loopholes” for corporations from The Fiscal Times (http://www.thefiscaltimes.com/Articles/2011/02/09/10-Big-Corporate-Tax-Breaks.aspx#page1) I removed the inflammatory editorial comments, but left the factual information intact. The gross annual tax effects are in parenthesis.
10) Graduated Corporate Income
This policy places the first $50,000 of a corporation’s profit at a 15 percent tax rate, with higher profit levels garnering higher tax rates, until it tops out at 35 percent for taxable corporate income exceeding $335,000. The result is that an owner of a small corporation pays only 15 percent in taxes on the first $50,000 of profit, leaving more left over potentially for reinvestment and growth.
5-yr Cost to Government (2011-2015): $16.4 billion
Who benefits: Individuals that own small corporations.
9) Inventory Property Sales
Foreign income of American companies is taxed in the country in which it is generated, and the U.S. gives a tax credit for that amount in order to avoid double taxation. Some companies have accumulated a glut of such tax credits (the “inventory”), and in order to use them up, they artificially boost foreign income through a “title passage rule” that allows companies to allocate 50 percent of income from U.S. production sold in another country as income generated by that foreign country (the “property sales”).
5-yr Cost to Government: $16.7 billion
Who benefits: Multinationals with operations in high-tax foreign countries.
8) Research and Experimentation Tax Credit
Intended to spur research and development within companies, in its simplest form this break allows for a 20 percent tax credit for “qualified research expenses.” There are more complex applications, as well. Detractors complain that it is paying corporations to do research they would have done anyway.
5-yr Cost to Government: $29.8 billion
Who benefits: Pharmaceutical companies, high tech companies, engineers, agriculture conglomerates.
7) Deferred Taxes for Financial Firms on Certain Income Earned Overseas
Because most financial firms conduct their foreign operations as branches rather than as subsidiaries, as most companies in other industries do, they do not benefit from the tax breaks afforded to foreign subsidiaries. To compensate, this loophole enables financial firms to treat income from their foreign branches as if they were subsidiaries, along with all of the attendant tax benefits.
5-yr Cost to Government: $29.9 billion
Who benefits: Any financial firm with foreign operations.
6) Alcohol Fuel Credit
This is a tax credit for the production of alcohol-based fuel, most commonly ethanol, which is made from corn. The credit ranges from $0.39 to $0.60 per gallon. In theory, the credit is meant to encourage alternative forms of energy to imported oil. It is largely responsible for propping up the price of corn, and is extremely popular in corn-producing states like Iowa and Illinois.
5-yr Cost to Government: $32 billion
Who benefits: Food and agricultural conglomerates in the Midwest.
5) Credit for Low-Income Housing Investments
As you might expect, this one gives tax breaks to companies that develop low-income housing. It’s the rule that’s responsible for so many larger new developments setting aside 20 percent or 40 percent of their units for people whose income is well below the area’s median gross income.
5-yr Cost to Government: $34.5 billion
Who benefits: Real estate developers.
4) Accelerated Depreciation of Machinery and Equipment
This one allows companies to deduct for all of the depreciation of a piece of equipment at once (as opposed to over the, say, 20 years it actually takes the item to depreciate). This is the equivalent of the U.S. government giving the company an up-front, interest free loan. Congress recently made this expenditure temporarily even larger for 2011, to encourage investment in equipment.
5-yr Cost to Government: $51.7 billion
Who benefits: Airlines and manufacturers using large equipment that lasts many years.
3) Deduction for Domestic Manufacturing
This loophole enables a tax deduction for manufacturing activities conducted by American companies within the United States. It covers conventional manufacturers, but also extends to industries like software development and film production. The intent is to keep manufacturing from being outsourced.
5-yr Cost to Government: $58 billion
Who benefits: Any U.S. company that produces a product within U.S. borders.
2) Exclusion of Interest on State and Local Bonds
Companies (and individuals) do not pay federal income tax on interest from their investments in state and municipal bonds. What’s more, private companies can in some cases issue tax-free bonds of their own for projects that benefit the public, such as construction of an airport, stadium or hospital.
5-yr Cost to Government: $59.8 billion
Who benefits: High-income investors and corporations.
1) Deferral of Income from Controlled Foreign Corporations
Multinational companies can defer paying U.S. income taxes until they transfer overseas profits back to the United States, under this law. In practice, many companies leave much of their profits overseas indefinitely, thus paying only the tax in the relevant foreign country, which is likely far lower than the U.S. rate, and avoiding U.S. taxes permanently. The list of corporations enlisting this loophole is seemingly endless.
5-yr Cost to Government: $172.1 billion
Who benefits: Every multinational company.
Commentary: I reviewed a plethora of articles searching for the items on this list. Virtually everyone to one degree or another had a headline implying something similar to “Loopholes that evil businesses use to cheat on their tax obligations.”
As I have said in other posts, I am all for going after anyone using trickery to cheat on their taxes. However, every single one of the above list was put into the code intentionally to encourage some activity that was deemed socially or economically beneficial at the time.
If the tax code is not working as intended or if activities are no longer worthy of being incented, then by all means change them. But, don’t blame corporations for following the law.
If the United States didn’t have one of the highest business tax rates in the world, we would not have to provide so much in incentives to allow us to compete with other countries on an equal footing. If we really want to cut these incentives, let’s be sure to conduct an economic cost/benefit analysis to determine the end-to-end impact. My guess is that to be rational, changes in tax incentives would have to be accompanied by reductions in tax rate.
A lot of people’s ire and most of the media hype is aimed at the “evil” major business beneficiaries in the “Who Benefits” explanations. However, an end-to-end cost/benefit analysis would have to include what the incentive means downstream. For example, are real estate developers the only ones that benefit from the credit for low-income housing investment? How about the people who have jobs building those houses? How about low income individuals who use the end product?
Does anyone really believe that increasing corporate taxes will not be passed on to consumers in the end?