The conversation on corporate tax expenditures is complicated by an official tax baseline that relies on a misleading definition of spending through the tax code.
The US government uses the term tax expenditure to describe both privileges granted to politically favored special interests and patches to the tax system that address economic inefficiencies created by the income tax code. This use of the term confuses two very different phenomena and muddies policy discussions about tax reform.
A new study from the Mercatus Center at George Mason University examines the current accounting of tax expenditures, presents case studies of some corporate tax expenditures, and proposes reforms to reduce favoritism in the tax code. The study investigates the difference between tax expenditures that privilege a particular group at the expense of others and tax provisions that, if properly accounted for, would not be counted as tax expenditures at all.
A corporate tax expenditure is defined as a provision in the tax code that allows a firm or group of firms to not pay a tax which would otherwise be collected.
- The modern US tax system is built on the income tax. This system double-taxes investment and savings, distorting market decisions and slowing economic growth.
- To correct these distortions in the income tax, some special tax provisions were created to mitigate biases against savings and investment and offset other distortions.
- Current methods employed by Congress’s Joint Committee on Taxation (JCT) and the administration’s Office of Management and Budget (OMB) for assessing the fiscal impact of tax expenditures use the income tax as the “baseline” from which to make their count.
- Under the current accounting methods, broadly available tax expenditures that correct for economic bias are economically indistinguishable from government-provided tax subsidies that benefit some businesses and industries at the expense of others.
- A superior tax expenditure baseline would rely on consumption, which would provide a more equal
treatment of economic activity and focus attention on tax provisions that truly provide unfair advantages.
However, even by the standards of a consumption baseline, most corporate tax expenditures are unnecessary privileges that provide unfair advantages to certain industries and firms.
- Sixty-five percent of corporate tax expenditures privilege certain activities or industries while excluding others.
- The proliferation of corporate tax expenditures results in disparate effective tax rates that distort consumption and investment and motivate wasteful rent-seeking.
- The growth of tax expenditures also increases compliance costs by contributing to the lengthening of the tax code, which in the past 30 years has nearly tripled in length, from 26,300 pages in 1984 to the almost 75,000-page behemoth it is today.
…And Paul Ryan is Still Right To Fix It
I selected this article not because of the Paul Ryan budget, but because it has this chart (see below) produced by Veronique de Rugy for the Mercatus Center at George Mason University, that reveals which countries pay what in corporate taxes. We knew the U.S. had among the highest, but like most, I didn’t know the U.S. has the #1 highest. And right behind us are France, Belgium, and Mexico.
I didn’t know that Canada, Iceland, and Switzerland have the lowest. I suspect those countries have fewer rigged policies and armored truck-sized loopholes (managed by corrupt legislators dispensing favors and punishments) and probably enjoy better tax revenues, too, as corporations have far less motive to either move their operations somewhere else, or try to shelter their profits from punitive taxation. Capitol tends to flee high tax regions, and seek lower tax regions. Are Iceland and Canada radical ‘anti-tax’ Tea Party countries? Hardly. The best reason to have an abnormally high corporate tax rate is to insure opportunities for graft and corruption. If a corporation wants tax relief, well, it just needs to know which campaigns to contribute money to.
Veronique de Rugy writes: Chairman Paul Ryan put out the blueprint for his FY2015 budget on Tuesday. I will have more to say about it in the next few days, but first I’ll focus on one idea in his budget: reforming our tax system and, specifically, reducing the U.S. corporate-tax rate from 35 to 25 percent and shifting from a worldwide tax system to a territorial system. These are very good policy proposals.
The extremes of that chart, reflecting 2013 rates, haven’t changed since 2011: National statutory corporate-tax rates among the 34 members of the OECD range from 8.5 percent in Switzerland to 35 percent in the United States.
Despite having the highest national statutory rate, the United States raises less revenue from its corporate tax than the other members of the OECD on average. In fact, the federal corporate-income tax raised just (roughly) 10 percent of total federal tax revenues in 2013.
To make matters worse, yesterday marked a sad anniversary: the second year in a row where the U.S. not only has the highest statutory rate but also has the highest combined rate (39.2 percent) when both the federal and average state rates are added. Japan used to hold the record for combined rates (39.8 percent), until it lowered its combined rate to 36.8 percent in April 2012. Read the rest of this entry »
Michael Bastasch writes: The Obama administration is painting a much rosier picture of American jobs than the data supports, two researchers claim.
They have been touting their recent study showing that nearly every state has seen its private sector shrink under the Obama administration.
“Our findings show that for many states, the impact of the recession and slow recovery on the private sector has been more severe than the official economic data indicates,” Keith Hall, a senior fellow at the free-market Mercatus Center, told The Daily Caller News Foundation.
Hall and fellow researcher Robert Greene found that 41 states saw their private sectors shrink from 2007 to 2012. Alabama, Arizona, Florida, Idaho and Nevada have seen the largest contractions in their respective private sectors — in 2012, Nevada’s has shrunk 13 percent below 2007 levels.
Charles Blahous writes: Today the Mercatus Center is releasing a study I completed earlier this year that comprehensively analyzes the policy decisions underlying federal deficits. Too often partisan advocates focus on a limited time period to purposely throw blame on a targeted political figure. Instead I dissected the entire budget, identifying deficit-driving policies regardless of when they were enacted. The study was a mammoth undertaking; it required the digestion of practically every Congressional Budget Office (CBO) and Office of Management and Budget (OMB) budget report published over the past forty years.
The striking finding is that more than three-quarters of our long-term fiscal problem derives from a set of policy decisions made over a period of just seven years, 1965 to 1972. 1965 saw the establishment of Medicare and Medicaid, advocated for and signed by President Lyndon B. Johnson. Both of these programs were later expanded in 1972 during the Nixon administration, as was Social Security. Nothing done by any recent President or Congress carries long-term fiscal consequences as daunting as those arising from these 1965-72 decisions. Read the rest of this entry »
Ted Johnson writes: Adding to a growing body of competing data on who bears the blame for rampant online infringement, two George Mason U scholars unveiled a website that claims that few of the most pirated movies are even available online legally.
Shorter windows would help counter piracy, the authors say, though theater owners are unlikely to agree with changing windows substantially in the near future.
The site — piracydata.org — shows that of the top 10 most pirated movies in the past week, none are available for streaming, three were available for digital rental and six were available for digital purchase. The authors of the study, Jerry Brito and Eli Dourado from GMU’s Mercatus Center and developer Matt Sherman, relied on data from TorrentFreak and Can I Stream It. The top pirated movie, “Pacific Rim,” was available only for digital purchase, their study showed.
The study showed that over the past three weeks, 53% of the most pirated movies have been available legally in some digital form. In the same period, only 25% have been available for rental or streaming, and 0% have been available on a legal streaming service.
By Ben Goad and Julian Hattem
President Obama has overseen a dramatic expansion of the regulatory state that will outlast his time in the White House.
The reach of the executive branch has advanced steadily on his watch, further solidifying the power of bureaucrats who churn out regulations that touch nearly every aspect of American life and business.
Experts debate whether federal rulemaking has accelerated under Obama, but few dispute that Washington — for better or worse — is reaching deeper than ever before into the workings of society.
“It would be difficult for anyone to pretend that this isn’t a high water mark in terms of regulation,” said Douglas Holtz-Eakin, a former director of the nonpartisan Congressional Budget Office who now heads the American Action Forum.
Whenever a free-market research or business group releases a “best and worst” list of states, my eye goes straight to the bottom: To see whether California is last or was edged out for the lowest rank by one of the other mismanaged liberal bastions. Illinois seems to exist to boost the self-esteem of Californians.
I can raise a glass of zinfandel to California’s great victory in the Mercatus Center’s recent “Freedom in the 50 States” study. The state didn’t place last. That distinction went to New York, thanks to its highest-in-the-nation tax rates and entrepreneur-crushing economic regulations. I owe an apology to residents of the Land of Lincoln.
For all the study’s detail about tax rates and regulation, this information jumps out as the most telling about New York: “9.0 percent of the state’s 2000 population, on net, left the state for another state between 2000 and 2011, the highest such figure in the nation.” Moving is the surest sign of dissatisfaction, especially when people relocate from a state that has long been an economic and cultural magnet.
Californians talk incessantly about high-tailing it to Texas or Nevada, yet New Yorkers flee at about double our rate. Migration numbers aside, I would still rank the Golden State as the Most Hopeless State. There are other studies that bolster that case, including Chief Executive magazine’s “2013 Best and Worst States for Business” that places California dead last, with New York in 49th place.
The magazine ranks states based on three categories: taxation and regulation, workforce quality, and living environment. Even with its natural advantages in the last category and high ranking in the second one, California still flopped because its officials have adopted a punitive environment in the first category. That takes some doing…