What’s driving the tax games corporations play?

To make sure corporations pay their fair tax share, we need to make sure individuals are paying theirs.

Image Credit: Andrew Roberts

How do we make sure America’s corporations pay their fair share of the nation’s taxes? We cut away, team Biden is now proposing, at the thicket of tax loopholes that Corporate America is now so shamelessly exploiting. U.S. corporations — the world’s most profitable — are currently paying just 7.8 percent of their profits in federal income taxes. The United States collects, the Treasury Department points out, “less in corporate tax revenues as a share of GDP than almost any advanced economy.”

The Biden administration’s focus on corporate tax-dodging could hardly be more welcome. But the emerging debate over corporate taxes is so far overlooking one core reality we can’t afford to ignore: To make sure corporations pay their fair tax share, we need to make sure individuals are paying theirs.

And right now, of course, rich individuals are not paying that fair share. Billionaire Warren Buffett has been famously pointing out, for well over a decade now, that he pays taxes at a lower rate than his secretary. No deep pockets today pay over 37 percent of any income dollar in federal income tax. In the middle of the 20th century, by contrast, individual income over $200,000 faced a tax rate just over 90 percent.

Back in those days, major corporations also faced taxes at appreciable rates, around 50 percent of profits from the early 1950s to the late 1970s. And corporations did that paying without much fuss. Their corporate tax departments operated cautiously. Top execs feared getting caught cheating on their corporate tax returns, worried that cheating charges would blemish their company image.

Larry Langdon, a former tax director at Hewlett-Packard, remembered those days clearly years later in an interview with ace tax journalist David Cay Johnston. In his days at Hewlett-Packard, Langdon noted, any questionable tax maneuver would be subject to a simple test.

“My boss would say, ‘I want you to write the article that you imagine that the New York Times or Wall Street Journal would run if they find out about this, and if the article passes muster, we will consider doing the thing,” he recalled. “The deals that couldn’t pass that muster were not done.”

In the mid-20th century, top corporate executives like Larry Langdon’s boss had no particular personal incentive to engage in shady tax deals that might boost their corporation’s bottom-line. Why bother? Any added income they could gain individually from that shady corporate dealing would face a 91 percent tax rate.

But that sort of corporate caution started evaporating as federal tax rates on high levels of individual income started sinking, from 91 to 70 percent in 1964, then from 70 to 50 percent in 1981 and from 50 to 28 percent in 1986. Shady tax maneuvers that fattened corporate bottom lines would turn out to have far more appeal for executives who no longer faced stiff tax rates on their own personal earnings. These execs would soon come to expect corporate tax departments to start doing whatever they could, in Langdon’s words, to “aggressively reduce” the corporate tax burden.

And corporate tax departments have been doing that aggressive reducing ever since. Sleepy corporate tax departments have become vital corporate “profit centers” that have significantly enriched the corporate executive class.

Just how much enriching has taken place? This past February, Grinnell College economist Eric Ohrn released an eye-opening analysis of the impact of just two of the many tax loopholes that Corporate America has worked so diligently to put and keep in place, bonus depreciation and the “Domestic Production Activities Deduction.”

For every dollar a corporation benefits from these two tax breaks, Ohrn’s research has found, that firm’s five highest-paid executives gain 15 to 19 cents. A mere one percentage point decrease in corporate costs due to bonus depreciation, adds Ohrn, increases executive pay by 4.4 percent. Every percentage-point of corporate savings from the domestic activities deduction jumps executive compensation 3.2 percent.

Average corporate workers, meanwhile, see no comparable benefit. Corporate tax breaks, Ohrn concludes, “increase within-firm income inequality.”

“America’s corporate tax system has long been broken,” Treasury secretary Janet Yellen pointed out earlier this week. “So too has been the way we think about corporate taxation.”

But we can’t afford, our last half-century of tax history suggests, to think about corporate taxation in isolation, separate from how we tax individuals. If we let our largest cohort of super-rich individuals — our corporate execs — continue to accumulate as much as they can grab, they’ll continue to have a powerful personal incentive to sabotage any moves that aim to make sure our corporations pay their fair tax share.

Low tax rates on high personal incomes enflame greed fever. We need to tamp that fever down. If we don’t, we’ll put at risk whatever corporate tax fixes the Biden administration can bring us.


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