August 28, 2014

GAO Report Highlights Arbitrary Corporate Tax System

  • The nation's fiscal future depends on the balance between the spending in the federal budget and the revenues flowing into the treasury. Tax policy...

Profitable American companies pay an average of only 12.6 percent of their income in taxes, much less than the official 35 percent corporate tax rate, according to a study released this month by the Government Accountability Office (GAO).

Many special provisions in the tax code favor some companies over others. These are sometimes called tax expenditures because they function much like direct government spending, providing benefits for some taxpayers at the expense of others.

With the nation facing severe fiscal challenges in the years ahead, many Americans are asking -- with good reason -- why many profitable corporations are allowed to pay so little.

Largely because of loopholes and other tax breaks, the GAO reports, corporate income taxes have dropped over the past 50 years from about 25 percent of total government revenue to just 9 percent.

In May a Senate subcommittee hearing focused attention on how the tax code allowed Apple to legally avoid paying taxes on billions of dollars in profits. While some lawmakers criticized the company, the real fault lies with Congress for failing to pass more reasonable tax laws.

The new GAO report shows how arbitrary the current system has become, and provides support for efforts to make the tax code simpler, fairer and more efficient.

Senators Max Baucus (D-Mont.) and Orrin Hatch (R-Utah) recently suggested a good reform option: a “zero-based” approach that would remove all tax expenditures and then reinstitute only those that can be justified by specific criteria such as enhancing fairness or economic growth.