Sen. Levin Should Know That Corporate Income Taxes are Taxes on Profits; No Profits, No Taxes

Yesterday we criticized the errors in an Associated Press story about a recent report issued by the Government Accountability Office (GAO), which found that many U.S. corporations had no corporate tax liability from 1998-2005. The study had been requested by Sens. Carl Levin (D-MI) and Byron Dorgan (D-ND), who immediately seized it as evidence of widespread corporate tax evasion:

Senator Dorgan called the conclusions "a shocking indictment of the current tax system." "It’s shameful that so many corporations make big profits and pay nothing to support our country. The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls,” Dorgan said. "It’s time for the big corporations to pay their fair share."

“This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States,” said Senator Levin.

The biggest "tax loophole" at work, however, is unprofitability. In the vast majority of cases, the corporation did not pay tax because it had no profits. The corporate income tax is a tax on profits, and if there are no profits, there are no taxes on those profits. Sen. Levin should be aware of this; General Motors in his home state lost $10.5 billion in 2005, and I'd be surprised if he thinks their "fair share" of taxes on profits should be anything higher than zero. As for corporations that had profits, almost all of them paid taxes.

Now don't get me wrong, there are legitimate tax loopholes that ought to eliminated. Credits and deductions inserted by special interests and only applicable to a narrow group ought to be the first junked in a comprehensive tax reform. But citing the GAO report as evidence that unprofitable businesses should pay profits taxes, when no profits exist, displays either ignorance or demogoguery.