Based on the latest news coming out of Washington, politicians in both parties recognize that we urgently need tax reform in this country to help small businesses. But that just makes it even sadder that we are practically guaranteed that nothing will be done in the near future.
According to reports, President Obama is proposing to reduce the top corporate tax rate from 35 percent to 28 percent in exchange for closing a number of loopholes and subsidies. That would be a nice first step toward simplifying our outrageously complicated tax system.
Right now, the United States has one of the highest corporate tax rates in the world. Only Japan’s is higher. But despite that high statutory rate, big corporations limit their contribution to the tax man thanks to massive loopholes and tax shelters, courtesy of expensive lobbying efforts. According to multiple studies, the biggest corporations in the country pay an effective tax rate much lower, and some have gamed the system so far that they pay no income tax at all.
The Citizens for Tax Justice and the Institute on Taxation and Economic Policy studied Fortune 500 companies that had a profit each year from 2008 to 2010. Of those companies, the average tax rate was 18.5 percent, while more than 10 percent of the companies studied managed to earn a negative tax rate (on average, -6.7 percent)!
So our high corporate tax rate has not resulted in high taxes on the biggest, most profitable corporations. But where our high tax rates have had an impact is on small businesses. Small businesses can’t afford lobbyists to carve out loopholes with Congress. Small businesses don’t have huge accounting departments to look for every remotely plausible deduction and shelter.
The result is that small businesses, despite registering much smaller profits and logically falling into a lower tax bracket than a behemoth like General Electric, DuPont, or Verizon Communications, pay a comparable or even higher effective tax rate! According to the Small Business Administration, the federal effective tax rates for small businesses average 20 percent. For small sole proprietorships, it averages 13.3 percent, small partnerships pay 23.6 percent on average, while small S Corporations average 26.9 percent.
So our complex tax system, combining high rates with large loopholes, is easily exploited by the largest businesses while at the same time placing a heavy burden on small business. That is wrong.
Small business is the heart of this country. Entrepreneurism is our greatest virtue, and this country’s economy will not turn around with a revival for small businesses. That requires reforming the tax code.
While President Obama’s proposal contains a number of other elements that I will leave to economists to judge, the basic idea of lowering rates and closing loopholes is sound. If anything, his proposal doesn’t go far enough—but it’s a nice first step in the right direction.
But in reality, it’s all just political rhetoric. Many Republicans have talked about reforming the tax code, and even the President, based on this proposal, agrees that it needs to happen, but no one expects anything to get done.
In the New York Times’ coverage of the story—in the news section, not the opinion pages—the reporter simply asserted, “But an overhaul of the corporate code is unlikely this year, given that political backdrop and the complexity of an undertaking that would generate a lobbying frenzy as businesses vie to defend old tax breaks or win new ones.”
That is what’s wrong. Leadership, the virtue that we supposedly look for in our elected officials, is about doing the right thing, not the convenient thing (or the thing that makes your opponent look bad and you look good). Both sides agree on the basic principle involved, but nobody wants to do anything about it, and the special interest lobbyists will make sure it goes nowhere. What a sad thought.