May 4, 2011
As Congress members return this week from recess the battle over the budget will soon begin. In Comparing the Obama – Ryan Budget Proposals we noted Obama wants to raise taxes by repealing the Bush era tax cuts for the wealthy and close some tax loopholes. The GOP refuses to consider any tax revenue increases at all. Over the last several weeks (and years) we have been reminded numerous times that America’s corporations and the wealthy often pay less in taxes than the average citizen. But given our dire budget situation shouldn’t everyone and every corporation be paying their fair share for the good of the nation?
Granted no one likes taxes but there is a need to invest in the infrastructure that supports our society plus pay for our endless wars and debts. Taxes should be fair and reasonable. But lawmakers have failed miserably on all accounts. The negative discourse over taxes that has dominated our political landscape for many years has placed our common wealth in great peril. Lost in this discourse is that taxes are the investment we make to build and maintain the infrastructure that supports our society and that all of us, regardless of stature, uses. Also lost in these budget debates is the cost to our common wealth supporting endless wars and debts. I don’t expect the killing of Bin Laden to end America’s war on terror anytime soon. Following the same rationale of ‘support our troops’, what is our patriotic duties with respect to our nation’s financial well-being?
In a replay of a theme recycled numerous times over the last 30 years Obama in his State of the Union Address challenged lawmakers and the nation:
“So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years.”
Although he defeated his own challenge by extending the Bush tax cuts he now wants to repeal that action. Naturally the GOP will oppose him. Many of today’s staunch conservatives, regardless of their own personal financial stature, support tax breaks and subsidies for corporations and the wealthy. Most Republicans have the mindset that everything can be earned but nothing is owed and anything can be achieved but nothing should be given. This mindset often materializes through their tax policies. It is this mindset that allows most conservatives to oppose welfare and government funds for the needy fearing this encourages freeloaders but see no contradiction in supporting government funding via tax breaks, tax shelters, and subsidies for corporations and the wealthy. In their view this is how the free markets are supposed to function. In fulfilling this time honored principle that those who are the most successful should be rewarded the GOP’s budget plan as proposed by Senator Ryan in order to continue the tax breaks for the wealthy calls for more cuts to programs that support seniors and the needy.
In some respects many of today’s conservatives are a different breed from their predecessors. A recent New York Times article G.E.’s Strategies Let It Avoid Taxes Altogether illustrates this when reporting that as G.E. has evolved over the years it, “has used, and in some cases pioneered, aggressive strategies to lower its tax bill.” Per the report “in the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E., a company for which he had once worked as a commercial pitchman, was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.” He reportedly told his Treasury secretary Donald T. Regan at the time that:
“I didn’t realize things had gotten that far out of line,” according to Mr. Regan’s 1988 memoir.
At the time the economy was stuck in a stubborn recession, high unemployment, and high inflation. The government ran massive deficits in the wake of Reagan’s tax cuts in 1981 coupled with his massive peacetime military buildup and Congress’s continued overspending. Then as now some corporations and the wealthy took advantage of tax loop holes costing billions in potential Fed revenues.
The Times reports “that the former president supported a change that closed [many of these] loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.” His support resulted in the Tax Reform Act of 1986. The bill was officially sponsored by two Democratic Senators and garnered wide bipartisan support. Reagan during his signing statementsaid in part:
When I sign this bill into law, America will have the lowest marginal tax rates and the most modern tax code among major industrialized nations…in our lifetime we’ve seen marginal tax rates skyrocket as high as 90 percent, and not even the poor have been spared. As tax rates escalated, the tax code grew ever more tangled and complex, a haven for special interests and tax manipulators, but an impossible frustration for everybody else…and what about fairness for families? It’s in our families that America’s most important work gets done…blatantly unfair, our tax code became a source of bitterness and discouragement for the average taxpayer. It wasn’t too much to call it “un-American…Millions of working poor will be dropped from the tax rolls altogether and families will get a long-overdue break with lower rates and an almost doubled personal exemption…Flatter rates will mean more reward for that extra effort, and vanishing loopholes and a minimum tax will mean that everybody and every corporation pay their fair share.
“Everybody and every corporation pay their fair share?” Gosh, compared to today’s conservatives Reagan sounds almost like a progressive. At one point in time some Republicans did share the belief that everyone should pay their fair share and were concerned about unfair tax burdens shifting from higher income earners to low-income earners.
Another case in point is the Alternative Minimum Tax (AMT) enacted by the Tax Reform Act of 1969 and signed into law by President Nixon. AMT was enacted after it was learned that 155 high-income households had not paid a dime of federal income taxes. During his signing party Nixon explained:
Eight month ago I submitted a sweeping set of proposals to the Congress for the first major tax reform in 15 years, one which would make our tax system more fair…more than 9 million low-income people who pay taxes will be dropped from the tax rolls…a large number of high-income persons who have paid little or no Federal income taxes will now bear a fairer share of the tax burden through enactment of a minimum income tax…over 19 million additional people who pay taxes will find their annual task easier because they will find it advantageous to use the simple standard deduction, which is being significantly increased, rather than listing deductions separately…
Reagan’s 1986 tax reform wiped out billions in tax loopholes and used the money to lower tax rates across the board. But a lot has changed since then. As usual special interest and corporations like G.E. have and continue to channel millions of dollars annually at lawmakers lobbying for tax changes. It really didn’t take long after Reagan signed that reform bill into law for the vultures to begin circling around Washington to have them overturned. A Wall Street Journal article noted the day after the signing:
Yesterday, shortly after 11 a.m., Ronald Reagan signed HR 3838, the landmark tax-reform bill of 1986. The battle to get tax reform is over; the battle to keep it is just beginning.
Mr. Reagan recognized this in his statement at the signing ceremony, pledging to stop rate increase, and laying out a remarkably thoughtful explanation of the principles behind the movement to cut tax rates. Enjoy it while you can. Congress will be back on Jan. 6, and the movement to take away tax reform will start. (WSJ: Oct. 23, 1986) (Full piece here.)
In October 2006, the Tax Foundation reported in, Twenty Years Later: The Tax Reform Act of 1986:
Yesterday marked the 20th anniversary of the nation’s most recent federal tax overhaul—the Tax Reform Act of 1986. Although much of what that reform accomplished has been unwound over the years by lawmakers eager to reward constituents with tax preferences, it stands as a rare example of bipartisan support for fundamentally sound tax policy.
Today it appears we’ve come full circle on a well-worn path. Those damn pesky tax loopholes and corporate “tax manipulators” keep coming back like a nasty boil. In April 2010 a Forbes published an article What the Top U.S. Companies Pay in Taxes noting that G.E. and other of “the world’s biggest, most profitable corporations enjoy a far lower tax rate than you do–that is, if they pay taxes at all.” But fast forward to April 2011 and Forbes publishes another article by the same author with the same title but reverses it pitch that portrays quite a different situation writing that a “number of corporate titans are paying much higher rates than the average citizen.” The author gives a justification for the reasons why G.E. and other mega corporations take advantage of overseas tax shelters.
G.E. it seems is famous for inventing new ways to pay less in taxes. ProPublica.org reports in 5 Ways GE Plays the Tax Game just how creative they can be. In another related news release by Associated Press is an article that Super rich see federal taxes drop dramatically. A few of the wealthy do believe they should pay more of their fair share in taxes; see United for a Fair Economy
The bottom line is the U.S budget woes are serious and need to be brought into balance in order to stop piling on more debt. And the only way to do that will be through increasing revenue and making serious spending cuts at the same time.
These series of graphs tell the story well; rising international debt, increasing concentrations of wealth, lost savings of working people, explosive individual and national debt, and a declining dollar (see Dollar Index DXY chart). It seems clear that since the mid-term years of Reagan the nation has been in a long downward trend. The only real exponential growth has been in the nation’s debt, see Section 7: Federal Debt, Table 7.1 – Federal Debt at the End of year 1940 – 2009. This site has a series of graphs and slides reporting on this as well. The interest alone is a real cash cow for the underwriters of this debt.
The two major “Bush Tax cuts” the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 have festered debate since enactment with some claiming they benefit the wealthy and shift more of the tax burden to lower income earners. The Bush Tax cuts had sunset provisions built into them that were to expire in January 2010 but were extended for another 2 years by President Obama in the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation act of 2010. The Bush Tax cuts as with Reagan’s 1981 Tax cuts were sold to the American people that cutting the tax rates would eventually increase Fed Revenue. I have written an analysis debunking this theory that may be found here. This site has written a detailed analysis as well arriving at the same conclusions as I did.
Another piece of tax legislation that appears to benefit corporations was the American Jobs Creation Act of 2004 legislation signed into law by President Bush in October 2004. The Middle Class.org at the time gave the legislation thumbs down:
The American Jobs Creation Act of 2004 provides huge corporate tax cuts. The impetus for the bill was the need to rescind a $5 billion-a-year tax subsidy to American exporters that had been declared illegal by the World Trade Organization. To make up for the lost subsidy, the Act provides $137 billion in new tax cuts over the next ten years. Most of the windfall goes to major corporations. Among its many provisions, the Act cuts the top tax rate for U.S. manufacturers and changes the definition of “manufacturing” so that it applies to a host of new industries, from architects to coffee roasters. The Act provides a tax holiday to multinational corporations: they will be taxed at only 17 percent of the normal rate if they bring foreign profits back into the United States…
It’s worth noting we hear plenty of complaints that the corporate tax rate is too high at 35% and is one reason given for why U.S. multinational companies keep so much cash offshore. (See sideline cash) Yet one of the provisions in the Jobs Creation Act of 2004 was a “tax holiday to multinational corporations’ in which they will be taxed at only 17% of the normal rate if they bring foreign profits back into the United States.” In December 2010 Bloomberg reported in Dodging Repatriation Tax Lets U.S. Companies Bring Home Cash that business executives asked Obama for a “tax holiday to help them tap into more than a $ 1 trillion in offshore earnings much of it sitting in island tax havens”:
The money — including hundreds of billions in profits that U.S. companies attribute to overseas subsidiaries to avoid taxes — is supposed to be taxed at up to 35 percent when it’s brought home, or “repatriated.” Executives including John T. Chambers of Cisco Systems Inc. say a tax break would return a flood of cash and boost the economy.
What nobody’s saying publicly is that U.S. multinationals are already finding legal ways to avoid that tax. Over the years, they’ve brought cash home, tax-free, employing strategies with nicknames worthy of 1970s conspiracy thrillers — including “the Killer B” and “the Deadly D.”
In opposing the Jobs Creation Act Middle Class.org observed at the time:
This legislation is portrayed as a job creation measure, but there is nothing in the 650-page law to assure or even encourage the creation of a single job. Instead, the bill is a massive tax giveaway to a series of closely-tailored special interests with serious consequences for the federal deficit and middle-class priorities…
In outlining the provisions of the bill The Self Employed Web writes:
The bill is a treasure trove of tax goodies for companies ranging from General Electric to Plano Molding Co., a maker of tackle boxes in Republican House Speaker Dennis Hastert’s Illinois district.
Sen. John McCain, R-Ariz., who did not vote on the bill this week, called it the “worst example of the influence of the special interests I have ever seen.”
The new law is billed as a jobs creation act, but contains little that requires or even encourages companies to hire workers.
Will it create new jobs? “Jobs for tax professionals, yes,” says Scharin.
I often see bumper stickers proclaiming ‘support our troops.’ In flag waving cheer we honor our men and women who put their lives on the line defending America’s global hegemony and corporate America’s investments around the world under the facade of protecting our freedoms and promoting democracy. For those of us safely at home what are we willing to sacrifice for the good of our country?