Corporate-tax system needs overhaul

According to a report by the Government Accountability Office, 28% of large U.S. corporations paid no income tax in 2005. That’s bad, but not for the reason Sen. Byron Dorgan, D-N.D., implied when he declared: “It’s time for big corporations to pay their fair share” — that companies are evading the corporate income tax.

It’s bad, according to the Washington-based Tax Foundation, because “in the vast majority (85%) of cases where they did not [pay taxes], it was because they had zero or negative net income for 2005. For instance, American Airlines Inc. of Fort Worth, Texas, and General Motors Corp. of Detroit avoided income tax for 2005 by losing $862 million and $10.5 billion, respectively, in 2005.

It’s not good for the economy when more than 20% of the largest companies suffer losses.

Of the 28% of large companies that paid no income tax in 2005, 15% — or 4.2% of large companies overall — had profits that year.

Now, that is bad. It means the vast majority of large U.S. corporations were unable to figure out how to avoid collecting taxes for the federal government.

Most economists accept that companies don’t pay taxes, they merely collect them. Taxes are a cost of doing business for corporations, and they pass that cost on — either to their customers in higher prices, or to their employees in lower wages or benefits, or to their shareholders in the form of lower dividends and lower share prices.

Because of this cost of business, U.S corporations that collect taxes for the government in these ways are at a competitive disadvantage to companies in other countries that have lower corporate income taxes.

But such taxes are a way for members of Congress to disguise the true level of taxes individuals are paying. There is an old saying: “Don’t tax me, don’t tax thee; tax the fellow behind the tree.” Corporations are the trees, and individual taxpayers, though they don’t realize it, are the fellows behind the trees.

Mr. Dorgan and his colleagues no doubt understand this, and their ire is raised by the unwillingness of corporations to play the game.

They’re not too angry, however, because the existence of corporate taxes encourages companies to pay protection money through campaign contributions in the hope of winning tax exemptions that will ease their tax collection burdens.

So Mr. Dorgan and his colleagues don’t really want to tackle the issue of tax reform.

A thorough review of U.S. personal- and corporate-tax policy is long past overdue. In the highly competitive world economy, the United States cannot afford to handicap itself with an economically inefficient tax system acting as a brake.

Reform of the U.S. tax system should aim at raising the revenue needed by the federal government in the ways that do the least damage to the growth of the economy.

This review would examine the effect on behavior of all the current forms of taxation, such as personal and corporate income taxes, sales taxes, capital gains taxes, etc., and the likely impact of alternatives, such as consumption taxes, including value-added taxes.

Unfortunately, neither presidential candidate and neither political party has proposed a top-to-bottom re-examination of the nation’s tax system.

Sen. Barack Obama, D-Ill., proposes increasing income taxes on the wealthy and increasing taxes on capital, i.e., capital gains and dividends, while nibbling at the edges of corporate taxes.

Sen. John McCain, R-Ariz., wants to make the Bush tax cuts permanent and also plans to nibble at corporate taxes.

Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, also has proposed some changes to the corporate income tax but also has failed to propose a thorough review of the nation’s tax system.

This is not good enough. The country cannot afford an inefficient and distorting tax system.