What’s Wrong? Understanding the Tax Problem

Last updated on August 4, 2023

There has been much talk about the need to overhaul the tax code to fix loopholes that are exploited to evade taxes, and to make the tax code simpler. Corporate inversions, the new storm to hit the government, came about because of the weaknesses in the tax code. President Obama responded to it during his recent three-day fundraising visit to Los Angeles in the words “I don’t care if it’s legal. It’s wrong.”

Even though the President’s reaction does not suggest a solution or preventive measures, the IRS has been aggressively fighting illegal tax evasion all along. Most recently, they’ve relied on the foreign account tax compliance act (FATCA) and have gotten positive results. The Augusta Chronicle analyzes the present tax problem and a possible resolution:

“It’s our 30-year-old tax laws that make more than a dozen U.S. multinational companies – such as banana distributor Chiquita Brands and medical-device maker Medtronic – want to go through gymnastic contortions to broker inversion deals. Drugstore chain Walgreens wouldn’t be proposing a similar deal if the United States didn’t have the highest tax rate in the developed world – an effective federal-state rate of 40 percent.

“Indeed, of the 32 developed countries in the Organization for Economic Co-operation and Development, all but the United States have reduced corporate rates during the past two decades. The U.S. rate has been unchanged since the last tax-code overhaul in 1986.

“Even with special-interest loopholes and generous deductions, the United States still taxes corporations higher than Canada, China and the United Kingdom. And America is one of only a scant few countries in the world where its citizens and corporations are subject to taxes on income earned abroad.

“When it comes to discouraging domestic economic development, U.S. corporate taxes are a double-whammy. First, they rob Americans of employment opportunities by making it more profitable for U.S. companies to grow their businesses overseas. Then, by making it more advantageous to leave those profits overseas, they rob the U.S. economy of potential investment capital and the federal government of tax revenue.

“These prickly and outmoded tax laws literally are costing the U.S. billions in lost investments and revenue every year.

“A more reasonable tax rate would incentivize corporations to repatriate their foreign profits, which they could use to pay dividends or increase their stock prices by initiating a share buyback.

Instead, all that cash – up to $2 trillion by some estimates – remains overseas. Tech giant Apple, for example, paid only 8 percent of its worldwide profits in U.S. corporate income taxes by piling up profits in operations overseas.

“No wonder that, for all its compliance and collection costs, the corporate income tax produces very little revenue – just 1.8 percent of gross domestic product in 2013.

“We agree with the conclusion of the National Bureau of Economic Research’s recent report ‘Simulating the Elimination of the U.S. Corporate Income Tax,’ which advocates cutting the corporate tax to 9 percent with no loopholes. Such cuts can ‘produce rapid and dramatic increases in U.S. domestic investment, output, real wages and national saving.’”