The Corner

Economy & Business

Bernie’s Corporate -Tax Misconceptions

Last week, I did an NPR affiliate interview about Bernie Sanders’s claim that the vast majority of corporations in America pay no taxes. Since then, I have heard Sanders tout his talking point on the issue several times — so I thought I might as well comment.

In order to put some meat on his claim, the candidate had asked the Government Accountability Office to look at the question of how many companies didn’t pay any taxes. GAO obliged and here are the findings in one easy chart put together by the Washington Post:

As you can see the results are more complicated than Mr. Sanders makes it to be: 70 percent of companies don’t pay the corporate-income tax because either they don’t have a positive net income or when they do, not all of it is subjected to the tax.

Only 20 percent of large, profitable firms do not pay the corporate-income tax. They do pay state and local taxes as well as the payroll tax, though.

But even that isn’t as simple as it looks. First, the GAO number is problematic. For instance, it uses a company’s entire worldwide income but it only accounts for the taxes paid in the U.S. — ignoring the taxes paid to foreign governments on the revenue earned abroad and for which companies are getting a tax credit. So it is not so much that companies are not paying any taxes, is that they are not paying taxes to the U.S. government because they get a tax credit for taxes already paid if they decide to bring their money back to the U.S.

These tax credits are the result of Congress’s band-aid approach to solving the problem of our punishing worldwide tax system. If Mr. Sanders doesn’t like it and wants to be able to put his hand on some corporate-income tax when he is president, he should think of engaging in fundamental tax reform by moving to a territorial tax system like may OECD countries’ governments have done in the past and seriously lowering the corporate-tax rate.

Now, I suspect that his preferred plan will be to end the tax credit granted to companies for tax paid abroad. The result will be more inversions, fewer U.S. based companies, and even less corporate-tax revenue and economic growth.

There are other perfectly legitimate reasons for large and profitable companies to not have to pay any corporate-income tax in a given year (in this case 2012). One obvious issue is that under our system (and the systems in other countries) companies can carry losses forward and backward to offset their profits in positive years. Since we went through that big recession not so long ago, companies have a lot of losses to use currently, which pushes down their tax liabilities.

The Tax Foundation has an excellent report by Scott Greenberg on all the good reasons why a profitable company may not have to pay taxes nonetheless. There’s, for example, the issue of depreciation:

[…] the U.S. tax code allows corporations to treat a much larger fraction of the investment as a current year expense. Meanwhile, when calculating a corporation’s economic profit, it is appropriate to treat the entire cost of an investment as a current year expense.

As a result of these different calculation rules, a corporation with significant book income could have a much lower taxable income and an even lower economic profit. For example, we can imagine a corporation with $1 million in operating profits and $2 million in investment costs. Depending on how much of the investment the corporation treats as a current-year expense, the corporation could be making a large profit, no profit, or negative profit

Finally, I would be remise if I didn’t warn Mr. Sanders: Be careful what you wish for. In reality, corporations do not pay taxes; corporate workers do (especially in a global economy). According to various estimates, between 25 and 60 percent of the corporate-tax bill is shouldered by workers in the form of lower wages. Burdening workers further is probably not what he wants and yet that’s what he will get. The rest is paid for in the form of lower dividends and higher prices.

Now, it is not to say that some companies do not evade their taxes and that many will do everything they can to reduce their tax burden. Many taxpayers do, too. That’s made possible, however, because the tax code is a huge mess of deductions and credits (some legit and some less so) for individuals and corporations. What we need to do is have a simple and fair flat tax (read this excellent post by the Cato Institute’s Dan Mitchell about how that would work for corporations). If companies and people fill out a postcard-sized return based on a cash-flow tax system, there’s obviously less room for deceptions or avoidance. If we don’t, let’s stop being surprised that companies and individuals are constantly seeking to use existing deductions, credits, and exclusions while also trying to get lawmakers to carve the tax code further.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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