Corporate America's ability to sometimes pay little or no taxes on the income it earns has captured headlines recently. Consider this story from MSN Money: GE's Corporate Tax Bill: Zero. There's also this one from The Daily Beast: 15 Top Corporate Tax Dodgers. ABC News weighed in with a slightly less incendiary take on the matter in its story, Big Corporate Profits, Small Tax Bill.
As most corporate treasurers and CFOs know, GE and other companies can legally lower their tax bills by using a variety of what some call loopholes, others call tax credits or deductions, and still others term tax expenditures. Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the “Budget Act”) as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” Examples include credits for R&D activities and the ability to accelerate depreciation.
While corporate America can avail itself of a range of tax expenditures, so can tax-paying individuals and households. Among the most well known are the deduction for mortgage interest payments and the reduced tax rates paid on dividends and capital gains.
In fact, taken together, the tax expenditures available to most middle-class households dwarf those available to companies, as this story in the Washington Post highlights.
A February report, Background Information on Tax Expenditure Analysis and Historical Survey of Tax Expenditure Estimates, by the Joint Committee on Taxation, a nonpartisan Congressional committee, shows just how stark the difference is. Between 2010 and 2014, the ten largest tax expenditures geared to individuals will amount to about $3.116 trillion, the JCT estimates. The corresponding amount for businesses? About $352 billion. Just the exclusion from taxes of employers' contributions for health insurance and health care, at $659 billion, is almost double the entire amount available to companies.
Compare that to the late 1970s, when the top ten individual tax expenditures totaled about $248 billion, versus $106 billion for corporate tax expenditures, again according to the JCT report.
Since then, numerous changes in the tax code have added to the number of tax expenditures for both companies and households. Among those geared to individuals are the reduced tax rates on capital gains and dividends, and the introduction of medical savings accounts, which allow contributors to defer taxes.
For both individual and corporate taxpayers, the current system is overly complex and inefficient, and can benefit the well-off, who are better able to take advantage of some of the tax expenditures, more so than those at the lower rungs of the income ladder. However, improving it will require a close and disinterested look at the ways in which different tax expenditures actually work.