Ahead of the Senate hearing on “Offshore Profit ShiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. and the U.S. TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Code,” I released a report reminding us that contrary to the perception created by these types of political spectacles, corporations pay a substantial amount of taxes to foreign governments. Even though individual companies may be doing their best to limit their overall tax burden, companies are still paying more than $100 billion to foreign governments.
There is another thing that is worth remembering as well.
It is true that corporations attempt to limit their tax burden through tax planning and the use of credits and deductions in the tax code. These “loopholes” reduce the amount of tax revenue that the government receives.
However, any discussion of these loopholes requires perspective.
Previous research by Tax Foundation has shown that, yes, corporations benefited from corporate tax expenditures that reduced their tax liability by a total of $102 billion dollars (2011 numbers). However, this pales in comparison to the tax benefits received by individuals.
The mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. alone is a bigger benefit than all of the corporate tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. combined; a benefit of $104 billion. The exclusion for health insurance nearly doubles all corporate tax expenditures at $177 billion. Altogether, these 5 major individual benefits in the above chart are 5 times more valuable than all corporate benefits combined.
Then would it make sense to go after working families for excessively taking advantage of the EITC, Home Mortgage Interest Deduction and Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. through tax planning to reduce their income tax burden to zero? Of course not: politicians created the current individual system with a number of credits and deductions. You cannot fault people for using them in order to lower their tax burden as much as possible.
In the same vein, it serves no useful purpose for politicians to go after individual corporations for reducing their tax burden in the same way. Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them. It is only rational.
This is not to say that individuals’ and corporations’ interactions with the tax code are the same. The point here is that incentives matter. If there are perfectly legal ways to reduce one’s tax burden, there should be no surprise that people do so.
Rand Paul put it nicely: Congress should look in the mirror. It is not Apple’s, or any individual corporation’s fault that the current tax system is a mess. It is instead Congress’ responsibility to fix the overly burdensome and complex corporate tax system.
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