Tax Code Works To Some Companies' Advantage
At least on paper, U.S. companies pay some of the highest corporate taxes in the industrialized world, and some members of Congress say cutting them is a sure way to jump-start the ailing economy.
But as with so many things about the tax code, the truth is a bit elusive.
The federal corporate tax rate is now 35 percent, and when state and local taxes are included, it rises to nearly 40 percent, according to the Organization for Economic Cooperation and Development. That’s higher than any other industrialized country but Japan.
In the 1960s, the United States boasted some of the lowest corporate tax rates in the world. But over time, more and more countries have cut business taxes as a way of helping their companies compete in a global economy, says Douglas Shackelford, professor of accounting and taxation at the University of North Carolina.
"If you want to create jobs here by attracting companies from overseas to invest here, and we want our American companies to expand here, then we should have a tax law that incentivizes them to do that," says Republican Sen. Judd Gregg of New Hampshire.
Gregg and Democratic Sen. Ron Wyden of Oregon this year sponsored a bill that would, among other things, cut the corporate tax rate to 25 percent.
But Steve Wamhoff, legislative director at Citizens for Tax Justice, says the tax burden on U.S. companies has been greatly exaggerated.
While the statutory tax rate is 35 percent, corporations benefit from numerous tax breaks, exemptions and deductions that bring their effective rate down to about 29 percent, Wamhoff says. That's about the median for OECD countries, he says.
For instance, companies get a huge deduction for domestic manufacturing expenses. "And they define manufacturing to include all sorts of crazy things like producing hamburgers for fast-food restaurants, writing software, extracting oil -- things that we would not really call 'manufacturing,'" he says.
Globalization has given multinational companies a lot of new opportunities to cut their taxes. They can set up offshore subsidiaries to shift profits into low-tax countries. They can borrow money in the United States, take a tax deduction and then shift the money they borrow to a foreign division, Shackelford says.
"So you're incented to, you know, sign up advisers and structure a Cayman Islands entity and do all sorts of different things, and basically you could keep going and going and really get to a point where the tail is wagging the dog, in terms of really having your tax advantages alter how you might otherwise do business," says Larry Harding, president and founder of High Street Partners, which advises companies doing business overseas.
To Brad Miller, chief financial officer of Emptoris, a software company based in Burlington, Mass., the complexity of the tax code puts an enormous burden on companies. Take employee expenses: "So for example, your typical hotel room would be deductible. [But] to the extent they do something that's viewed by the IRS as entertainment, that's not deductible," Miller says. "I have to have a way of keeping track of those things and making sure that there's integrity to the way that each one of those different sets of costs are tracked."
Navigating through the tax code requires good tax lawyers and advisers, which can be beyond the reach of some companies, especially smaller ones.
The maze of exemptions and deductions has been built into the tax code over many years by Congress, Gregg says.
"If you're in a certain type of business, you feel you have a unique situation, you come to Congress, you make your case. And if you're successful the tax laws are often adjusted to reflect your position," he says.
The bill proposed by Wyden and Gregg would strip away most of these special provisions, in exchange for cutting the corporate tax rate.
At a time of rising public concern about the deficit, however, any move that would cut the tax rate would likely face plenty of scrutiny in Congress.
Copyright 2023 NPR. To see more, visit https://www.npr.org.