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A Rare Opportunity to Address US Tax Inequality

2011 May 2

US tax rates on corporate profits range from 15–35%, but if you make it into the corporate major leagues you can weasel out of them entirely, or even be paid a tax bonus. On March 27, Bernie Sanders (I-VT) released “a list of some of the 10 worst corporate income tax avoiders:”

1) Exxon Mobil made $19 billion in profits in 2009.  Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS …

2) Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits …

3) Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1 billion refund from the IRS …

Good for them. A wise man once said, “don’t hate the playa, hate the game.” In this case, however, rather than hating the game, I recommend urging those who write the malleable rules of the game to fix them. After all, Obama campaigned on removing tax breaks and loopholes for both large corporations and wealthy investors.

Speaking of wealthy investors: they pay a smaller overall percentage in taxes than middle-class workers, even without taking advantage of our tax code’s myriad loopholes or hiding money in offshore havens. Warren Buffet conducted a survey of his office employees in ’07, finding that the average tax rate among them was 32.9%, while his was the lowest at 17.7%. Martin Sullivan of Tax.com recently calculated a startling comparison between the average NYC janitor and the average resident at the Helmsley Building:


[Image: Mother Jones article]

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With a deficit that Federal Reserve chairman Ben Bernanke recently called “simply unsustainable,” an upcoming presidential election, and less than two months remaining for bipartisan deficit-reduction talks (to resume on May 5), we are at a crossroads of opportunity.

On April 13, Obama blasted House Budget Chairman Paul Ryan’s (R-WI) 2012 budget resolution for $4.4 trillion in deficit reduction over the next 10 years, putting forth his own proposal with a similar long-term goal: reducing the deficit by $4 trillion over the next 12 years, $1 trillion of which would be achieved with tax increases. Obama’s plan includes a fail-safe trigger for further spending cuts in 2014 if necessary, but aims to avoid its activation by bolstering the economy, thus further increasing tax revenue.

One means by which Obama hopes to accomplish this economic boost is through changing the corporate tax code, and a specific white house proposal is due early May. According to John Harwood of the New York Times, the basic thrust will be reducing the tax ceiling on corporate profits from 35% to 26%, and offsetting the loss in revenue by eliminating corporate tax breaks and loopholes, with the goal of coming out even in overall corporate tax revenue. In other words, spread out what taxes are already being paid by corporations as a whole, so the major leaguers pay their share. While this would not immediately contribute to deficit reduction – as it would not immediately increase revenue – the intention is to build corporate tax revenue over time, as midlevel corporations benefit from their lower tax rate and grow. Whether or not this would have the desired effect, it would be a significant step toward fairness.

We’ll have to wait a few more days to see the specifics of Obama’s proposal, but we know it includes allowing the lopsided Bush tax cuts to expire at the end of 2012. Hopefully they will be replaced with legislation that keeps basically everything they included except the decrease in tax rates on dividends and capital gains: extremely wealthy people make most of their new money with their old money, so reducing these two tax rates to 15% was partly why the overall tax rate on wealthy investors dropped to around 15%. If an earlier 10-year Obama budget proposal is any indication, letting the Bush tax cuts expire would net around $340 billion over a decade.

Obama’s plan would also include limiting itemized deductions for the wealthiest 2% of Americans, which he says would bring in about $320 billion over 10 years. Finally, he vaguely called for reforming “our individual tax code so that it is fair and simple, so that the amount of taxes you pay isn’t determined by what kind of accountant you can afford.” This would somehow make up the remaining third of the $1 trillion; I believe Obama implied that such reformation would entail the removal of tax breaks and loopholes.

Whatever the result, there probably won’t be another opportunity like this for at least four years. If we are optimistic, hoping that America will pull out of these trying economic times, it might even be decades before we again see the budgetary and political climate necessary for tough, significant bipartisan compromise on overhauling our deeply corrupted tax laws.

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