Turbines at a wind farm in Rio Vista, Calif., March 30.
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We keep hearing that corporate tax legislation is full of “loopholes” and that large corporations are tax fraudsters because they use it and don’t pay their “fair share”. Is it true? No, most large corporations pay the amount of tax they pay because Congress wrote the tax law specifically to allow them to pay that amount.
Companies play the system. Recent academic evidence puts America’s 2017 corporate profit shift losses – largely in response to the uncompetitive US tax regime before the Tax Cuts and Jobs Act – at $ 26 billion. Corporate unrecoverable income tax owed was last estimated at $ 32 billion by the Internal Revenue Service in 2013.
However, the more significant loss of income is due to exceptions to the tax code. When it comes to lost corporate tax revenue, exceptions are the rule and non-compliance is the exception.
Many regulations allow taxpayers to pay less tax. Some are clearly one-off boondoggles while others achieve a social good. For example, tax law encourages investment in new factories and machinery through accelerated depreciation tax deduction, the use of net operating losses to encourage businesses to try ideas that may not always work, and tax credits that stimulate innovation in general or in specific activities like the Cure Rare Diseases. All of this reduces corporate tax revenues. But they were used to achieve a goal, not a nefarious conspiracy by big business.
It does not make sense to speak of loopholes. In many cases, companies do exactly what Congress intended them to do. Take the Clean Energy for America Act, which the Senate Finance Committee passed in May. Hoping to influence corporate behavior, proponents of the bill are rewriting tax legislation to reward renewable energy companies, even though many are doing well.
The bill would also help wealthy individuals buy a luxury electric vehicle with a tax credit – paid for by many American taxpayers who could never afford such a car. The Senate Finance Committee Democrats opposed Cassidy’s amendment that would have restricted the proposed expansion of the electric vehicle tax credit to non-luxury vehicles, defined as those that cost less than $ 47,500.
If the bill were to become law, the green corporations chosen by the Democrats would pay less taxes. Then, in hindsight, lawmakers are likely to point out the lower effective tax rates companies have and complain that they are exploiting a loophole. Politicians reprimand with one hand and hand out flyers with the other.
Once policymakers admit that companies are largely reacting to the tax laws created by Congress, they will have to face the real tradeoffs. That means thinking about what the country gets from each tax policy and deciding whether it is worth the lost revenue. If lawmakers can do that, America will be on the road to rational taxation that will lead to a more competitive economy.
Mr. Cassidy, a Republican, is a United States Senator from Louisiana. Mr. Hoopes is an associate professor of accounting at the University of North Carolina.
Wonder Land (04/14/21): More than 100 business leaders went to Davos on laptops to denigrate the Republicans and validate their progressive credentials. Image: Getty Images / iStock Photo
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Appeared in the print edition of June 9, 2021 as’ Lawmakers’ Hypocrisy In Blasting ‘Loopholes’.’