What’s a fair tax rate for companies?
Biden wants to raise corporate taxes and eliminate special breaks
President Biden’s bid to hike corporate taxes is dead on arrival, just like the rest of the $7.3 trillion budget plan he released on Monday. It’s too bad, because something — not necessarily what the president floated — should be done to make it harder for companies to dodge taxes.
The news: Biden’s corporate tax overhaul has three main components: increasing the top corporate rate to 28 percent from 21 percent; raising the minimum corporate rate to 21 percent; and curtailing deductibility of executive compensation. It would also eliminate a host of tax subsidies.
(The president also wants to impose a 25 percent minimum tax on people worth more than $100 million and push up the top individual rate to 39.6 percent.)
“Folks at home, does anybody really think the tax code is fair?” Biden said on Thursday in his State of the Union address, which he used to tease some of his proposals.
Everyone knows the tax code is a mess. But what is a fair share for companies to pay? People have been fighting over that question ever since the US initiated a corporate income tax in 1909. There’s zero chance that Democrats and Republicans will agree on any meaningful tax overhaul. Biden is hyping tax hikes on companies and the wealthy to draw a sharp line between him and Donald Trump.
Honestly, it’s easier to call out what doesn’t seem fair.
Like when 55 large companies, including AT&T, Bank of America, and Salesforce.com, each had an average effective tax rate of less than 5 percent for the years 2018 through 2022. That’s according to estimates in a new analysis of 342 profitable companies by the left-leaning Institute on Taxation and Economic Policy. ITEP found that another 205 companies had an effective tax rate of 10 percent to 21 percent.
“This is not because these corporations are violating tax laws, at least not as these laws are being interpreted and enforced today,” ITEP said. “Tax avoidance occurs because
Congress chooses to allow it, either by enacting special exceptions and breaks from the regular tax rules, or by leaving in place loopholes that are clearly being exploited.”
Step back: The 2017 tax bill passed by a Republican-controlled Congress cut the top corporate rate to 21 percent from 35 percent. But with deferrals, credits, subsidies, and other breaks, many businesses pay far less than that. Sometimes they pay nothing. The effective tax rate for profitable large corporations fell to 9 percent in 2018 from 16 percent in 2014, according to a 2022 study by the General Accounting Office, the nonpartisan research unit of Congress.
To make it harder to avoid corporate taxes, Biden’s Inflation Reduction Act, approved on strictly party line votes in 2022, set a minimum tax bill of 15 percent for companies reporting an average profit of $1 billion or more in the prior three years. Now the president wants to push that up to 21 percent.
He also supports an international agreement to set a global minimum tax that would require big companies to pay taxes in countries where their goods or services are sold, even if they have no physical presence there. Biden is proposing to raise the tax rate on the foreign earnings of US multinational companies from 10.5 percent to 21 percent.
Executive pay: Biden is also proposing that corporations — publicly traded and private — be prohibited from taking tax deductions on compensation exceeding $1 million a year for any employee, not just the CEOs and other top executives of public companies as covered in current federal law.
Critics argue that there is a link between tax avoidance and big executive pay packages.
In a report to be released on Wednesday, the left-leaning Institute for Policy Studies and Americans for Tax Fairness will find that a significant number of the profitable companies analyzed by ITEP paid their top executives more than they paid in federal taxes from 2018 to 2022.
Companies cited in the report include Tesla, T-Mobile, Netflix, and Ford.
“Tax avoidance and excessive executive pay aren’t unrelated,” said Sarah Anderson, lead author of the report. “Executives have incentives to push for tax cuts because they can reap the windfall.”
The report identified additional companies that paid their top executives more than they paid in federal income taxes in at least two of the five years of the
Critics argue that there is a link between tax avoidance and big executive pay packages.
study period. They include Boston-based biotech Vertex Pharmaceuticals and Textron, the industrial conglomerate headquartered in Providence, which each did so in three of the five years.
The numbers in the report are “inaccurate and incomplete,” Vertex said in a statement. “Vertex paid billions of dollars in income taxes during the period 2018-2023, which are fully disclosed in SEC filings.”
Textron declined to comment. Final thought: Organizations like ITEP and IPS shame companies to generate pressure on Congress to make companies pay more in taxes.
Unfortunately, too many lawmakers have no shame when caving to corporate pressure to preserve the status quo.