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Report on America’s “Broken” Tax System Shows Cracks of Its Own


Pete Sepp
December 12, 2013

Many voices, on various points of the political spectrum, concur that America’s corporate tax system is afflicted with a high rate, mind-numbing complexity, and heavy compliance burdens. Yet, the Center for Effective Government recently came out with a report attempting to demonstrate that there is no correlation between lower corporate tax rates and job creation. And while practically everyone agrees with the first line of the report’s Executive Summary – “The American corporate tax system is badly broken” – that’s not a good reason to buy all of its other conclusions.

The report states that, “Our examination of the evidence found no relationship between cutting tax rates on corporate profits and job growth.” And therein lies one major problem – the “evidence” itself.  As with a recent report from the Government Accountability Office, which we critiqued here, using a sample over a small window of time to calculate effective tax rates does not give a complete picture.

The time period used in the report – 2008 to 2012 – was one of abysmal job creation across the entire economy due to the severity of the Great Recession. Furthermore, corporations have demonstrated time and again how profits and losses fluctuate over several years based on expenditures such as research and development. So tying low job growth during a recession to tax rates over a short time period can’t possibly tell the whole story.

Connecting higher corporate taxes directly to increased job creation, without taking into account other factors – such as a given company’s industrial sector – is also tricky. It’s important to adjust for other reasons why tax rates may have been lower or higher (higher capital expenditures for which deductions apply) or why job creation may have increased or decreased (strength of an industry).

Although the report does acknowledge some need to overhaul the tax system, the agenda is clear in its data presentations, which purport to show why businesses must contribute more of the “revenue needed to invest in modernizing the transportation, information, communications, and energy infrastructure.”  In current budget lingo, “invest” is often code for “spend a whole lot more.” Furthermore, as my colleagues at the Tax Foundation ably pointed out, the study utilized “apples to oranges” comparisons of corporate profits and corporate taxes to paint a distorted picture.

Also tellingly, the study’s introduction notes that had businesses paid the 35 percent tax rate on all of their profits, “total corporate tax receipts would have been $630 billion (rather than the $242 billion they actually paid), and the deficit would have been reduced by nearly a third.” Of course, the same could be said for individuals: after all, if only America’s families would just cough up more at the regular statutory tax rates, instead of taking those pesky write-offs for things like mortgage interest, charitable contributions, or state and local tax payments, why the Treasury could be flush with surpluses.

The bottom line is that country after country continues to lower their corporate tax rates and simplify their taxpaying procedures, and they are doing this for a reason – to attract business and create job growth. Meanwhile, the U.S. tax system, with the worst rate in the industrialized world, continues to be a laggard in pursuing tax reform. Here’s hoping policymakers stop pointing fingers and start pointing the tax law in a better direction. 


 

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