Given its $1.5 trillion budget deficit, it's easy to argue that the federal government has a spending problem. But it's also true that the government has a revenue problem as well.
Due to high unemployment and lower incomes and wages, tax revenues have fallen to 15% of GDP, down from the historical average of !8% of GDP. As a share of GDP, income tax revenues are at their lowest level since 1951, when Harry S. Truman was president.
Federal tax revenues were much smaller in 2010 than in 2000, reports Pulitzer Prize winning writer David Cay Johnston. Total individual income tax receipts fell 30 percent in real terms. Since the population kept growing, income taxes per capita plummeted.
As Mr. Johnston notes, the historical data proves that, "Tax rate cuts did not pay for themselves, did not spur economic growth, did not increase jobs, and did not make America better off."
It was the combination of excess spending and irresponsible, unsupportable tax cuts that led to our growing deficits and potentially crippling debt.
Laura Tyson, an economist at the University of California, Berkeley, says a hodgepodge of tax loopholes — or "tax expenditures," as they're known — cost the Treasury more than a trillion dollars a year.
Even when the budgetary committees of the Congress are unwilling to increase spending, they are often willing to create a new tax credit. Congress is more inclined to approve a dollar of tax breaks than a dollar of direct federal spending, even though the effect on government coffers is the same.
For example, in December, Congress passed more than $800 billion worth of tax cuts in an effort to stimulate the economy. But spending that kind of money to achieve the same goal would have been virtually impossible.
Tax breaks can have unintended consequences, such as encouraging mal-investment or over-investment in a particular sector, such as housing for instance.
With our government so deeply in debt, it would be wise to end the multitude of tax breaks now.
In fact, the president's deficit commission recommended doing away with most tax breaks and creating a simpler system with lower rates.
The current system creates winners and losers. A simpler code, absent all the tax breaks and tax preferences for certain groups, would give taxpayers more confidence that everyone is paying a fair share.
The federal budget crisis is poised to worsen. Even if the government miraculously balanced its books and wiped out the deficit, it would still need trillions in additional revenues to begin shrinking the debt. It is time for the government to move to a multi-tiered tax system that eliminates all write-offs, credits and deductions.
According to the Congressional Joint Committee on Taxation, from 2010 to 2014, the cost of health care credits, mortgage interest and property tax write offs, plus deductions for retirement savings will be at least $2.5 trillion.
This essentially amounts to spending built directly into the tax code. However, the government can no longer afford the sum total of all the subsidies it has granted over the years.
The corporate tax system, in particular, is awash with abuses.
Although the top corporate tax rate in the United States is 35%, one of the highest in the world, companies have been increasingly using a complicated array of shelters, tax credits and subsidies to pay far less. Many big corporations actually pay very little, if anything at all.
For example, for the second consecutive year, Bank of America paid no federal taxes and actually reported a tax “benefit” of nearly $1 billion. And due to billions in accumulated losses, the mega bank will likely benefit from a reduced tax bill in future years as well.
Bank of America claims to have suffered a pre-tax loss of $5.4 billion in the U.S. in 2010. But an army of accountants and tax lawyers likely orchestrated that with a combination of smoke, mirrors and sleight of hand accounting.
Like other companies, Bank of America avoids paying taxes on profits they make in overseas operations by reinvesting these proceeds overseas, instead of bringing them back home. In essence, the tax code rewards behavior that is detrimental to the US.
Despite reporting US profits of $5.1 billion in 2010, and global profits of $14.2 billion, General Electric — the nation’s largest corporation — will pay no taxes for 2010. In fact, GE claimed a tax benefit of $3.2 billion.
How's that for self-enrichment?
Regulatory filings show that in the last five years, GE has accumulated $26 billion in American profits, and received a net tax benefit from the IRS of $4.1 billion.
It's not uncommon. The corporate share of the federal tax base has been shrinking for years.
The corporate share of federal tax receipts has dropped from 50% during World War II, to 30% in the 1950s, to 21% in 2001, to just 6.6% today. This amounts to nothing less than corporate welfare.
In 2004, Forbes magazine reported that one-third of America's largest and most profitable corporations paid zero taxes — or actually received credits — in at least one of the previous three years.
And, according to the Government Accountability office (the investigative arm of Congress), two out of three US corporations paid no taxes from 1998 through 2005. The study covered 1.3 million corporations of all sizes, with a collective $2.5 trillion in sales. It also included foreign corporations that do business in the US.
Corporations fiercely lobby for tax breaks and use every trick in the book to avoid paying taxes. GE’s giant tax department, for instance, includes former officials from the Treasury, the IRS and virtually all the tax-writing committees in Congress.
The present corporate tax system is wildly unfair, with some companies paying nothing, some paying 8% and others paying 35%.
To get a sense of just how inequitable the corporate tax system is, consider the tax rate paid by two of America's biggest companies: Wal-Mart paid 34 cents in taxes for every dollar of profit it made in the past three years. Meanwhile, General Electric paid just 3.6 cents on the dollar.
The tax code plays favorites, incentivizing and rewarding certain behaviors. It encourages mal-investment and the misallocation of money. In the end, tax breaks can make bad decisions seem like good ones.
For many companies, working the tax code is the key to higher profits. But American corporations are already doing quite well.
Of the 100 largest economies in the world, 53 are corporations; of those, 47 are U.S.-based.
No matter the rate, corporations will always complain about paying taxes, just as many individuals do. But while the statutory tax rate is 35%, the effective tax rate — the actual tax rate that companies pay after all the adjustments they make — is around 25% or so, says Roberton Williams of the Tax Policy Center in Washington.
If the government doesn't cut spending, simply the tax code, flatten rates and eliminate all deductions, credits and write offs, it will soon end up insolvent.
That will not be a good environment for any corporation or individual to do business.
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