A Revenue or a Spending Problem?…… Taxing Corporations
As has been stated before there are two ways to deal with budget problems:
- raise revenues
- cut spending
In this series of articles I’m looking at the revenue side of the equation to reduce the approximate $2 trillion federal deficit expected for the 2012 budget year.
The $2 trillion figure comes from the current projected $1.6 trillion budget deficit plus the $425 billion or so expected in interest payments on the National Debt which inexplicably is never included when reporting federal deficits.
The $2 trillion figure defines the ‘true deficit’. The true deficit is the amount that the National Debt actually grows each year.
In this article we take a look at corporate taxation.
What do we know?
The most recent available IRS tax statistics for corporations was just released earlier this month: 2008 Corporation Income Tax Return Summary
This IRS analysis presents statistical estimates extrapolated from a “stratified sample of more than 105,500 unaudited returns”.
Facts and Figures
2008 corporate tax highlights:
- 5.8 million corporate returns filed
- $76.8 trillion in total corporate assets
- $28.6 trillion in total receipts
- $984 billion in net income before expenses
- $978 billion in net income after expenses
- $342 billion in total income tax owed before tax credits
- $229 billion in actual taxes paid after tax credits applied
Each and every one of these figures are DOWN from 2007. They reflect the beginning of the financial crisis that raised its ugly head in late 2008.
When they become available, the 2009 returns are sure to show a far deeper and more painful plunge.
What Do These Numbers Mean?
It’s curious to note that 1 million corporations(17%) filing returns in 2008(see graphic above) listed zero assets. Why so many?
With total assets of $76.8 trillion, corporations reported only $978 billion in income after expenses. That is only 3.4% net profit on total receipts and just 1.3% of their total assets. That seems low but maybe not.
Their total income tax liability before tax credits was $342 billion. That is an average tax rate of 35%. Minus tax credits it drops down to the $228 billion that corporations actually paid in taxes.
So the real average federal tax rate paid by corporations in 2008 was 23.3% of income.
Tax Credits and Keynesian Macroeconomics
We always read and hear about how corporations hide profits in various tax dodges and loopholes that should be closed. Without doubt this is true.
This is where Keynesian macroeconomic theory comes into play: Keynesian Economics
Since the Great Depression Keynesian theory has dominated federal economic policy regardless which party is in power.
A central theme in Keynesian theory is the belief that private sector corporations will not make investment and economic decisions beneficial to the nation as a whole and that it is government’s responsibility, through economic policy, to guide them to do so.
That is accomplished primarily through tax credits used to make companies “do the right thing” for the benefit of the nation. It’s one of the foundation pillars of liberal economics. That method, for example, is now how the Obama Administration seeks to push its green economic agenda after cap and trade died.
It is also why we have all these farm and other subsidies and tax credits that do not seem to make any sense whatsoever anymore.
Corporations use tax credits and other Keynesian adjustments to the tax codes to their advantage.
They exist because bureaucrats hidden somewhere in the deep dark recesses of Washington DC decided they were necessary to guide the national economy to prosperity.
Welll… according to Keynesian macroeconomics theory that is what is supposed to happen.
But when you throw in the anonymous effects of re-election campaign paybacks, buying voters with pork barrel spending, general power mongering and hidden cronyism and the positive effects of Keynesian macroeconomics, if there are any, are diluted into nothingness.
Can Taxing Corporations More Pay Government’s Bills?
Some say that corporations hide profits in oversees accounts and pull all sorts of shenanigans using the system to avoid paying their fair tax share. No doubt there is truth in that statement. How much, though, is speculation.
For this analysis we will be realistic and work with the numbers we have rather than speculate on numbers we don’t have.
First off… if we did away with all the Keynesian tax credits and stuff then corporate tax revenues would be bumped back up from 23.3% to their true 35% official rate and would have brought in an additional $114 billion in actual revenues in 2008.
Some conservatives might find this number surprising since it was the last year of the Bush Administration, but the true deficit for calendar year 2008 was $1.46 trillion. That is an Obama-like deficit.
Corporations paying the full 35% tax rate would only have reduced that deficit to $1.35 trillion… hardly a drop in the bucket!
Even if we’d taxed corporations at 100% of their net profits before expenses, there still would have been a true deficit of $475 billion remaining in the federal budget in 2008!!
The situation has only got worse since then.
Can we tax corporations enough to pay the federal government’s bills?
Based on these numbers the short answer is, “No!”. Keep in mind, we haven’t even considered state and local taxes that must also be paid by corporations. So, realistically, its impossible.
With dividend payments and stock options and all the other avenues available to corporations for funneling over 20% of all wealth into the top 1% of wage earners over the last half century, its hard to think that corporations are paying their fair share of government’s costs. No doubt they are not!
At only a 23.3%, the real taxation rate corporations pay is low and can and should be more.
But this analysis proves that under the current tax system it is impossible to balance the federal budget by taxing corporations even at a 100% tax rate.
In fact, coupled with a previous analysis on individuals it is not realistically possible to tax both the rich and corporations enough to pay government’s bills.
Even considering the wealth gap, the simple fact remains that the federal government is violating Hauser’s Law. It is spending more than the historically sustainable 19.5% of GDP of the past. We’ve been above that level since 2006.
That is why it’s impossible in the current economy to tax enough to cover the bills and stop our National Debt from growing at supersonic speed.
Increasing revenues can and should be done. But that alone cannot and will not come close to solving our nation’s debt and deficit problems.
In addition to revenue increases we will, no matter what, have to make spending cuts – big, painful spending cuts – in order to reduce government’s slice of the GDP pie back down to more manageable levels.