Taxes

The Misleading Push for Corporate Tax Hikes

Corporations get attacked for not paying taxes in a certain year, but they’re just spreading out their losses.

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President Joe Biden's plan to spend $2 trillion on infrastructure was noteworthy not for proposing trillions of dollars in new spending—that's now par for the course in Washington—but for proposing commensurate tax hikes as well. The corporate taxes that Biden laid out are likely to be popular among Americans constantly bombarded by stories about large businesses with low tax burdens. But the increases will do real damage to the economy.

Whenever a new story comes out about "profitable" corporations not paying taxes, it almost invariably can be traced back to the Institution on Taxation and Economic Policy (ITEP). This is the advocacy group that launched that round of articles about Amazon paying zero federal income taxes a couple years back, and it just put out a report declaring that 55 large American corporations with "pre-tax profits" are getting away with paying no federal income tax.

A corporation's book profits are actually an unhelpful metric when it comes to assessing what its tax liability should be. While the tax code is far from perfect, many deductions and credits that reduce liabilities serve an important purpose and help make the tax code fairer. Calculating a corporation's income before factoring these in makes as much sense as complaining that a kid with a summer job gets to avoid paying regular income taxes because of the "standard deduction loophole."

For example, consider net operating loss (NOL) carryforwards and carrybacks, one of the most common culprits behind these sensational headlines. These are normal features of a smart policy that allows corporations to pay taxes based on a realistic view of their cash flow over time.

Imagine a start-up business that spends two years developing its feature product, only to release it in the next year. If that business ran a deficit of $2 million the previous two years, then made a $1 million profit the third year, it has not actually made a profit in the long term. Disallowing NOL deductions from being carried forward would mean that the business would face corporate income tax liability despite having, thus far, lost money.

Failing to understand this simple calculation has led to a lot of confusion. Last year's Coronavirus Aid, Relief, and Economic Security (CARES) Act undid a limitation on carrybacks that was included in the 2017 tax reform law to make the tax reform bill's budget math work for reconciliation. The New York Times quickly blasted the CARES Act provision as a "bonanza for rich real estate investors."

Democrats had also included language in many bills expanding the use of net operating losses. That didn't stop dozens of Democratic legislators from trying to rile up their base with a letter to Speaker Nancy Pelosi (D–Calif.) calling these changes "giveaways" and "gimmicks."

NOL carryforwards were one reason Amazon had no federal tax liability when those articles appeared a couple years back. Another was the research and development (R&D) tax credit, long a bipartisan favorite. The Obama administration in 2012 identified the R&D credit as a crucial element of business tax reform, claiming that businesses undervalue R&D in the absence of the credit as the social benefit is far greater. It's deeply disingenuous to incentivize R&D, then wag your finger when businesses respond to the incentives the R&D credit provides.

Then there's accelerated depreciation. One of the most positive changes in the 2017 tax reform law was the introduction of full expensing of capital investments, which allowed businesses to bypass the complicated system of asset depreciation that requires them to recoup the value of capital investments over timelines as long as decades. Huffing and puffing that businesses use full expensing to zero out their tax liabilities is absurd, because it merely accelerates tax deductions businesses would receive anyway. In other words, the long-term "cost" of accelerated depreciation in terms of revenue reduction is zero. The difference is that businesses, which prefer cash on hand to cash down the line, are then able to reinvest the value of the deduction immediately rather than waiting years to receive the tax benefit.

Any company that receives a tax benefit for capital investments is by definition engaging in the type of business activity liberals say they want to see. If corporations follow the tax code's incentives, they get hit for not paying enough taxes; if they don't, they get slammed for not contributing to economic growth.

The purpose of these reports is to lay the groundwork for corporate tax increases, as we are seeing with Biden's infrastructure plan. Corporate taxes are popular because many voters don't believe corporate taxes affect them, but they are mistaken. Corporate tax rates are directly linked to wage growth, and labor bears 70 percent or more of the cost of the corporate tax through lower paychecks.

Biden's corporate tax changes would also work against efforts to make the American tax code more competitive. Not only would he make the combined federal and state corporate tax rate the highest in the industrialized world, but he would undo the 2017 tax reform law's efforts to bring the U.S. in line with other countries' tax treatment of foreign corporate tax income. Returning to an antiquated "global" tax system would only encourage more companies to shift their headquarters to another, more business-friendly nation.

Americans shouldn't be fooled by this full-court media press. The case for these tax hikes is built on a flimsy understanding of tax policy, and the increases would end up hurting American workers.

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70 responses to “The Misleading Push for Corporate Tax Hikes

  1. So what if they lost money, they still owe the government taxes. If they can’t pay taxes they shouldn’t be in business.

    1. “Imagine a start-up business that spends two years developing its feature product, only to release it in the next year. If that business ran a deficit of $2 million the previous two years, then made a $1 million profit the third year, it has not actually made a profit in the long term. Disallowing NOL deductions from being carried forward would mean that the business would face corporate income tax liability despite having, thus far, lost money.”

      Precisely. Why the hell do I care if they lost money? Your long term outlook is none of my concern. What IS my concern is companies that are raking in millions or billions paying taxes on that.

      This author is sitting over here acting like Amazon of all companies can’t pay a damn tax bill. Get real.

      1. They didn’t get a damn tax bill. Get real.

        1. No shit sherlock. Because our tax laws are fucked. That’s the whole point.

          1. Our tax laws are designed to encourage growth and reinvestment, not stagnation

            1. You’re responding to a retard.

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          2. “No shit sherlock. Because our tax laws are fucked. That’s the whole point.”

            Correct.
            You should pay all taxes. Problem fixed.

      2. Thank you for proving liberals are economically stupid.

        1. The article itself made a fair try at it, but he really took it to the next level.

      3. “Your long term outlook is none of my concern.”

        You just shot yourself in the foot!

        It’s not “outlook” as in forward thinking anyway. It’s historical financial performance over the past several years.

      4. Why do you think you or any government deserves the income of any individual or corporation

        1. Cuz raspy is a useful idiot for bloated government. And an ugly, resentful bitch.

      5. Everything Is So Terrible And Unfair! ™, raspy.

    2. If they go out of business, they should be forced back into business or be jailed.

      /Venezuela

    3. You’re being sarcastic. Right?

      Or has the woke crowd made it onto the comments section at Reason?

      1. to the authors section fer sure.

      2. “Or has the woke crowd made it onto the comments section at Reason?”

        Where have you been?

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  2. He doesn’t have the votes anyway even for budget reconciliation.

      1. You are missing the point.

        A couple of Senate Democrats have come out publicly as being against the tax plan.

        VP Harris doesn’t get to vote at all unless there is a tie on a specific vote. Even if it goes to reconciliation, with the current Senate make up, if even one Democrat votes against it in the Senate, the bill will not pass.

        Assuming it goes to reconciliation, they still may not have the votes to pass it.

        1. Just so you know, you’re responding to a retard.

  3. “would only encourage more companies to shift their headquarters to another, more business-friendly nation.”

    So much for patriotism. Fuckers shouldn’t call themselves Americans.

    1. The whole crew of lefty retards here.

    2. What a bunch of greedy fucks, wanting keep more of what they earned for themselves. They should just be happy we let them keep anything at all.

      1. They earned? Who is they? The workers? A singular person cannot generate much income, outside of entertainment.

        1. You realize when the government takes money from a corporation, they don’t give it back to the employees of that corporation, right?

          Now kindly go fuck yourself commie.

    3. Multi nationals don’t. I ought to know. I worked for a very old, fortune 200 company headquartered in NY. If you ever said they were an “American” company, they would have corrected you. They would have said the were a multinational and that they followed he rules and laws of each country they operated in.

      Ask me how I know.

      1. How do you know?

    4. Yeah, a lot of companies are democrat owned. As democrats are incapable of patriotism, they will bail at the first sign of trouble.

      We actually agree on something.

    5. Like they have been holding back? They go where taxes are cheaper as it is. Without a universal rate they will always do this. Businesses, especially, big ones, cook THE FUCK out of their books to avoid taxes!

    6. And now we appeal to patriotism… for taxes.

    7. Enabling bloated government waste is totes patriotic.

  4. China just announced they are cutting business taxes. Hilarious.

    1. They plan to bury us economically. And, they are slowly but surely succeeding.

      We tend to believe that politics drive power. But, economics does just as much as politics.

      The CCP is in the business of accumulating as much power over as many people as they possibly can.

      1. “They plan to bury us economically.”

        No, they plan on allowing us to bury ourselves.

    2. Janet Yellen hardest hit!

  5. Then there’s accelerated depreciation. One of the most positive changes in the 2017 tax reform law was the introduction of full expensing of capital investments, which allowed businesses to bypass the complicated system of asset depreciation that requires them to recoup the value of capital investments over timelines as long as decades. Huffing and puffing that businesses use full expensing to zero out their tax liabilities is absurd, because it merely accelerates tax deductions businesses would receive anyway. In other words, the long-term “cost” of accelerated depreciation in terms of revenue reduction is zero. The difference is that businesses, which prefer cash on hand to cash down the line, are then able to reinvest the value of the deduction immediately rather than waiting years to receive the tax benefit.

    This paragraph is complete nonsense. A sensible approach to depreciation is to spread it over the useful life of the investment. That’s the way you accurately reflect the company’s operation. This is sort of the mirror image of your NOL argument.

    And the business about “it merely accelerates tax deductions businesses would receive anyway. In other words, the long-term “cost” of accelerated depreciation in terms of revenue reduction is zero. ” is a total howler. Of course that’s what it does, and that’s hugely advantageous, as is obvious from the fact that business routinely asks for more rapid depreciation schedules.

    1. You miss the entire intent of the accelerated depreciation legislation. The legislature wants to encourage capital investment and business expansion because they see this as being “good for the economy”.

      You can disagree with this all you want but, this is what happens when tax law is used to incentivize social, economic and political policies rather than just to collect an income tax.

    2. I can tell you don’t run a capital intensive business, and have no idea how this works.

      1. Articles like this always seem to attract the high school kids that think they understand things.

  6. According to the CBO (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjU0cb6w-rvAhWMmeAKHdLRD6kQFjAAegQIBhAD&url=https%3A%2F%2Fwww.cbo.gov%2Fsites%2Fdefault%2Ffiles%2Fcbofiles%2Fftpdocs%2F3xx%2Fdoc304%2Fcorptax.pdf&usg=AOvVaw2DEFwMCJqMAbe7Tsulp8Be)

    A corporation may write its check to the Internal Revenue Service for payment of the
    corporate income tax, but that money must come from somewhere: from reduced
    returns to investors in the company, lower wages to its workers, or higher prices that
    consumers pay for the products the company produces. Understanding the mechanisms
    through which those tax burdens are transferred is crucial in determining the
    economic effects of the corporate income tax.

    Although economists are far from a consensus about exactly
    who bears how much of the burden of the corporate income tax, the existing studies
    highlight the significant types of economic mechanisms as well as the empirical
    estimates necessary for further quantifying the burdens. CBO’s review of the studies
    yields the following conclusions:

    o The short-term burden of the corporate tax probably falls on
    stockholders or investors in general, but may fall on some more than
    on others, because not all investments are taxed at the same rate.

    o The long-term burden of corporate or dividend taxation is unlikely to
    rest fully on corporate equity, because it will remain there only if
    marginal investment is not affected by those taxes. Most economists
    believe that the corporate tax system has some effect on investment
    decisions.

    o Most evidence from closed-economy, general-equilibrium models
    suggests that given reasonable parameters, the long-term incidence of
    the corporate tax falls on capital in general.

    o In the context of international capital mobility, the burden of the
    corporate tax may be shifted onto immobile factors (such as labor or
    land), but only to the degree that the capital and outputs of different
    countries can be substituted.

    o In the very long term, the burden is likely to be shifted in part to
    labor, if the corporate tax dampens capital accumulation.

    o Most attempts to distribute the burden of corporate taxation have
    neglected the possible importance of effects on the relative prices of
    products.

    1. THIS is why I argue we should only tax business. They are going to pass it on anyway. It avoids individuals being double and triple taxed or worse.

      1. Why do you hate poor people?

  7. Corporate income taxes account for about $200-$300B in annual revenue (e.g. $230.2 billion in fiscal year 2019). Compliance costs for business to determine how much tax they owe is also estimated at about $100-200B annually (e.g. 2016 estimate of 2,832,500,000 man-hours and $147.5B). In other words, it costs corporations about as much to determine how much they owe as they actually owe.

    Not to mention the inordinate amount of effort that goes into determining how to run the business when various tax considerations come into play (e.g. when to buy equipment, or hiring that 50th employee) instead of simply doing what’s best for the business for business reasons rather than tax reasons.

    And virtually all of these taxes and compliance costs get passed on directly to consumers/labor/shareholders.

    And almost every bit of “corporate welfare” comes in the form of special tax breaks–eliminate the tax breaks and you eliminate the corporate welfare and the millions of dollars of lobbyist money showered on politicians as they try to seek those special tax breaks.

    Another number worth noting is the annual shortfall in collections from individuals, which is, coincidentally, also estimated at $250-$300B per year. Focus the IRS on the missing $300B in uncollected individual taxes and you pretty much offset the corporate tax revenues (assuming they were eliminated).

    Clearly eliminating the corporate income tax would provide a needed shot in the arm to the economy, as it would free up something like $500-600B annually (taxes plus compliance costs) and would make the USA a very attractive place to HQ businesses in. It would probably keep some jobs from being shipped overseas too, by lowering the cost of doing business in the US relative to elsewhere.

    Almost all of that money would eventually end up being taxes elsewhere, for example as dividends paid out, or in increased wages. Or perhaps it results in additional jobs being created and those wages are taxes.

    But NO! We have to punish those evil corporations so that they pay “their fair share” without once EVER defining what fair share is. As it is in most years 2/3s of all companies don’t make enough profit to owe corporate income taxes, but they have to pay to comply with them.

    1. Agreed, I’ve long believed that corporate taxes should be abolished.
      It doesn’t strike me that corps would just sit there with untaxed profits in the bank year after year. It would be spent on new jobs (taxed), dividends (taxed), rennovating offices (create jobs/income and is taxed). There’s nowhere for it to go where it won’t be taxed, and probably at a higher rate than corp taxes.

  8. How many times do we have to say it?

    Corporations don’t pay taxes! Their customers do.

    1. With the added accounting friction; lose-lose.

    2. That sounds like a thinly veiled impotent threat to me. Supply and demand don’t stop working because you pay taxes. If customers don’t want to pay for your shit, you can lower prices or go out of business.

      If there are businesses whose existence hinges on a 10% nominal tax rate difference, then we simply get to accelerate some market churn.

      Who is losing here? Whose interests are you sticking up for? Goblins sitting on mountains of wealth so big their grandchildren could never spend it, or bad business models?

      1. This is the notion of corporations that all progressives seem to have (goblins sitting on mountains of wealth) and similarly for rich people having swimming pools filled with gold coins (Scrooge McDuck). Also that all corporations are run by robber barons twisting their waxed mustaches in glee at the plight of their poor overwork underpaid slaves, er, I mean employees.

        This is so very narrow-minded and shortsighted. Sure, there are a few behemoths corporations run in a very questionable manner, but the huge majority of corporations are run by good people who do their best for their employees and are generous with the profits. I work for one. My wife works for a different one. My brother works for one. Pretty much everyone I know works for a “good company”.

        And I’m not even talking about the 68% of corporations that are small S corps, run by “mom-and-pop” with pass-through income.

        The corproate income tax is grossly inefficient at generating revenue and huge drag on the economy with the overhead it entails–it costs about $1 in compliance costs for every $1 in tax revenue generated. Creating the incentives for corporate profits to flow out into the economy would generate tax revenues far more efficiently.

        If you’re really worried about a corporation sitting on a pile of cash, goblin style, then tweak the 0% corporate tax rate to only apply to profits that are paid out in dividends within, say, three years and apply a small pressure, say 10 or 15% on cash held.

        1. I was making a very narrow point about the nature of supply and demand. I don’t actually have these notions of businesspeople. I like capitalism. I like making and having money.

          I have no interest in assessing individual people’s moral worth before deciding on macroeconomic policy. Taxes are about incentivizing desired behavior, not rewarding it. The system is inefficient and incentivizes undesirable behavior, thanks to the economic philosophical regime we’ve been living under since a monkey’s costar was president.

          Fitting that it all came crashing down thanks to another celebrity president.

      2. Tony is obviously a business owner. . . . Not. An accountant……Not. A knee jerk minion. . . Yes.

    3. Exactly. So how about only tax them so they can pass it on, thus eliminating double and triple taxation of the individual.

  9. How about no corporate tax rate, no special ‘tax exempt’ or targeted incentives either. Every org gets a tax ID, and distributions (dividends or owner’s draw) are taxed at the individual level as income.

    Double taxation is inefficient to administer and creates perverse incentives.

  10. Raising taxes on corporations and rich people polls incredibly well. I doubt that is only because Democrats make such a persuasive case.

    Now, you and I both know that taxes as revenue is a fiction. In a superpower with fiat money, taxes are pretty much only a tool to create incentives.

    The people, D and R, perceive systemic unfairness. They see their own paychecks stagnate for 30 years while business productivity has increased at the same linear upward rate it has for two centuries.

    When Republicans are in power, they, on autopilot, make policy to suppress wages and rake up all those gains for the top tier. It’s fine. It’s what they’re here for. But this is a genuine fleecing, and since we’re a democratic society, the people have every reason to complain.

    We could just be honest and talk about how this is all about who’s pockets the country’s wealth is in, but we can’t do that without you people screeching about communism, as if it’s only capitalism if humanity’s output is stolen by the 1%.

    We can keep good ideas like low capital gains taxes, competitive corporate taxes, and whatever, if we only could talk about these things honestly and stop inserting our simplistic ape-brain moral demands into everything, and that goes for right and left.

    The other problem is that the Republican party discovered that their ideas are shit, that nobody likes what they’re selling, so the decided to do the responsible thing and try to end democracy so they don’t have to ask our permission.

    1. Is your point that raising corporate taxes is pointless? That’s the only point I’m getting out of this (after I scan through the ad hominem bitching).

      1. He’s drunk. Again.

      2. I would say listening to people’s protestations about their own tax rates is pointless. Everyone wants more money in their pockets.

        You should reread, it was a good post.

        1. Make up your mind: should I read your post, or is it pointless to listen to people bitching about the fairness of their tax burden?

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  13. I noted that Jeff Bezos recently came out in support of changes to the taxes that will likely include tax increases for corporation. Corporations and businesses are getting the message that they are expected to be good citizens. That means contribution to general good in the form of infrastructure. It also means opposing regressive changes to the election laws. This because the the people running the corporation/business see the future.
    As I have often noted, the keys to fighting socialist impulse of youth people (the future) is not to try to scare them with images of Stalinist Russia but rather to polish up the image of US capitalism.

    1. Jeff Bezos can handle a tax increase. His competition might not.

      1. I suspect that more corporations than Amazon can handle a tax increases. What more the increase is less than what they paid in the past. Corporation will still have a historical low rate and get the value of virtue signaling.

        Those that can not handle the increase were likely already on the rocks. So the question could come down to improving infrastructure or saving failing companies. I say go with the infrastructure (the future) rather than failing companies (the past).

    2. Bezos virtue signaling? Or he has better accountants than Uncle Joe.

  14. More reasons to despise some media outlets and the ignorance generated by our beneficent school system, teachers unions or whomever else is to be blamed for lack of knowledge. The “richest country in the world” mantra is bullshit if we kill the golden goose.

  15. they really don’t understand economics. Read This: https://dernekciler.com/dernek-muhasebesi/

  16. > Biden’s corporate tax changes would also work against efforts to make the American tax code more competitive. Not only would he make the combined federal and state corporate tax rate the highest in the industrialized world, but he would undo the 2017 tax reform law’s efforts to bring the U.S. in line with other countries’ tax treatment of foreign corporate tax income.

    I wouldn’t worry about this. Janice Yellen is going to ask all the other countries to charge the same rate and I am sure that they will do this so it’s not an issue.

  17. The Institution on Taxation and Economic Policy received a $364,300 PPP loan funded by tax dollars that will be used to fund research into increases taxes.

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