Taxes are a Pandora's box

  • Article by: C. FORD RUNGE
  • Updated: July 31, 2011 - 7:14 PM
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The game of chicken between the White House and the Republican-controlled House of Representatives over deficit reduction and the debt ceiling has resembled Minnesota's earlier budget struggle and shutdown -- although it has global economic implications that the Minnesota imbroglio did not.

In both cases, Republicans have made opposition to new taxes their touchstone. In this they show little originality. Taxes have been unpopular since Rome was imperial.

But government services are not free, and taxes are the means by which they are made possible. The question is: How can taxes be structured in ways that are fair and efficient and create improved incentives?

To suggest that taxes will cease as an instrument of fiscal policy, or that they will not increase in the face of irresponsible deficits run up by the Congress and the administration, is delusional.

Nonetheless, Republicans claim that any new taxes will "kill jobs," because U.S. businesses are already overtaxed. If they had glanced at their own Congressional Research Service's report of March 31, "International Corporate Tax Rate Comparisons and Policy Implications," they would learn that the United States had an effective tax rate in 2008 of 27.1 percent, slightly less than the 27.7 percent weighted average among industrialized nations' as a whole.

Even stalwart Republican economists such as Martin Feldstein and Gregory Mankiw, according to the July 13 New York Times, favor raising taxes by closing loopholes.

Republicans' feigned horror at the prospect of new taxes masks a dirty secret. The trouble is not just about raising taxes but about opening them to discussion at all.

The old taxes are so skewed in favor of the already rich that to open them to scrutiny would reveal a box unnerving even to Pandora, and especially damaging to the vast majority of Republicans who have pledged fealty to Grover Norquist and his no-new-taxes manifesto.

At both the state and federal level, tax exemptions and special arrangements for favored corporations result not just in tax avoidance but in actual transfers from state and federal coffers to companies and individuals.

These "negative taxes" are subsidies paid to some of the biggest companies in the nation. No one likes paying taxes, but who wants an open discussion when the tax system pays you?

Let's get specific. In June, Citizens for Tax Justice, a Washington watchdog group, released a partial list from a major forthcoming study of effective tax rates paid by Fortune 500 companies.

The 12 corporations analyzed were American Electric Power, Boeing, Dupont, Exxon Mobil, FedEx, General Electric, Honeywell, IBM, United Technologies, Verizon, Wells Fargo and Yahoo. From 2008 through 2010, these companies together reported $171 billion in pretax profits, but as a group, their federal income taxes were a negative $2.5 billion. In other words, they were collectively subsidized.

Eight of these firms reported negative taxes, including Minnesota's Honeywell International, with three-year profits of $4.9 billion and federal taxes of a negative $34 million. Wells Fargo, with $49 billion in profits, received a net tax benefit of $681 million. GE was the largest net negative taxpayer from 2008-2010, with $7.7 billion in profits and $4.7 billion in negative taxes.

Forbes magazine (hardly the Socialist Worker) noted that the explanation is often that these corporations transfer tax liability across international operations, so that the final accounting shows U.S. divisions operating at a loss.

Christopher Helman, a Forbes financial analyst, noted in an April 2 article that General Electric has two divisions: General Electric Capital and everything else -- engines, power plants, etc.

Over the last two years, GE Capital's risky lending has generated major losses in the United States ($6.5 billion in 2009), while its overseas operations showed healthy profits ($4.3 billion in the same year). U.S. losses, according to Helman, both balance out overseas gains and allow GE to defer taxes on overseas income indefinitely.

Even so, if the domestic side of these companies is losing money, should they receive compensation from the U.S. Treasury?

At the state level, Minnesota companies can also transfer gains out of state, costing Minnesota taxpayers millions of dollars in annual revenues.

It is one thing to argue that taxes interfere with the capacity of businesses to grow and invest. This is undoubtedly true. Tax-free treatment would be blissful for businesses (and very bad for society).

But it is quite another thing to realize that growth and investment by already rich companies have been subsidized by taxpayers, many with modest incomes. This is because the tax system has become rigged to shift wealth and income from the bottom to the top, a fact that Grover Norquist and his minions would prefer that you not learn. Now you know.

C. Ford Runge is Distinguished McKnight University Professor of Applied Economics and Law at the University of Minnesota. This article reflects his opinions and not those of the university.

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