Cleaning up corporate taxes is proving to be a difficult job for U.S. legislators. A number of bills have been proposed to close tax loopholes, but politicians cannot agree on the best way of preventing companies from dodging taxes.
According to many business leaders, the high federal tax rate, which currently stands at 35 percent for corporations, means that they have to exploit every loophole in the tax law to protect their company's profits. The House Budget Committee appears to agree. It has embraced the principle of cutting the headline rate for federal corporate taxes in exchange for a host of measures designed to close tax loopholes and crack down on special deductions for corporations.
However, many corporations do not want to give up their tax deductions, of which there are many. Retailers are able to write off advertising expenses, while manufacturers get deductions for equipment purchases. The oil and gas industries insist that they could not function without their special deduction for drilling expenses.
All these loopholes in corporate taxes cause big headaches for tax officials and politicians. According to Senator Carl Levin, a Democrat from Michigan who has introduced two bills designed to close corporate tax loopholes, many tax deductions do nothing to encourage economic productivity. He argues that these deductions should be the first to go.
Levin's first targets are tax loopholes that allow corporations to join with overseas companies and therefore reduce the amount of corporate taxes they have to pay in the United States. These tax-dodging foreign takeovers are known as inversions, and they have faced particularly heavy criticism from politicians who are keen to clean up corporate taxes.
High-profile companies, such as Google and Microsoft, have exploited loopholes to avoid paying billions of dollars in corporate taxes to the IRS. According to the Joint Committee on Taxation, corporations off-shoring profits shaves $50 billion a year off the federal government's total revenue.
Some Democrats argue that the overhaul of corporate taxes should not be revenue-neutral. According to progressive tax advocate Robert S. McIntyre, there is no reason why the revenue gained by closing tax loopholes should be given back to companies in the form of lower federal corporate tax rates. These tax campaigners claim that corporations have gotten away with paying "hardly anything" in corporate taxes for far too long.
Those on the other end of the political spectrum strongly disagree. According to Republican Representative David Camp, companies will continue to find and exploit tax loopholes as long as U.S. corporate taxes remain the highest in the world. He proposes closing the tax loopholes but using the extra revenue to lower overall rates.
Some states have already lowered corporate taxes in an attempt to give businesses a break. A few economists propose an even more radical solution: eliminate corporate taxes altogether and replace it with extra taxes on shareholders' income.
With so many different opinions, cleaning up corporate taxes will be a difficult task. There is a danger that even as the most exploited loopholes are closed, companies will find new ways to dodge taxes and protect their net profits.
(Photo courtesy of luigi diamanti at FreeDigital Photos.net)