Letter to Ways & Means on Disappearing Corporate Taxes

February 11, 2020

U.S. House of Representatives
Ways & Means Committee
1100 Longworth House Office Bldg.
Washington, DC  20515
Via email to: WMdem.submission@mail.house.gov

Re: Hearing on “The Disappearing Corporate Income Tax”                                             

Dear Chairman Neal, Ranking Member Brady and Honorable Committee Members:

On behalf of Public Citizen’s more than 500,000 members and supporters, we write to thank you for holding this important hearing to examine one of the clearest examples of our nation’s rigged tax code: large, profitable corporations paying a declining share of taxes, leaving average Americans and small businesses to pick up a greater proportion of the tab for important government services. Some of the reasons for this imbalance are the slashed corporate rate, ongoing profit shifting, and mismatched enforcement priorities at the Internal Revenue Service (IRS).

In 1952, nearly one-third of the government’s tax revenues came from corporate taxes.[1] But, in 2018 and 2019, that share was less than 7% of the total.[2] Though corporate tax receipts have been trending downward and making up a smaller portion of the government’s revenue sources over many years, the marked drop of about a third of that number– from around from 9% to 6.1% of the total from 2017 to 2018– was unrelated to an economic downturn as was the one that caused the drop in corporate tax shares in 2009. The disappearing corporate tax is a direct impact of the 2017 tax giveaway package, the Tax Cuts and Jobs Act (TCJA) (Public Law No. 115-97), which directly cut the share of taxes paid by corporations by slashing the corporate rate around 40% from 35% to 21%.

Corporations expect the government to provide them with services like streets, rails, and ports to move their products; courts to uphold their contracts; and schools to educate their workforces—yet they are paying a smaller and smaller portion of the total cost for these services. Worse, more than 90 profitable Fortune 500 corporations paid nothing at all in federal taxes in 2018—with many even receiving a refund.[3] While innumerable loopholes exist in the code that must be closed, a simple and straightforward way to increase corporate tax receipts is to increase the corporate rate. Restoring the corporate tax rate from the current 21% back to the pre-TCJA rate of 35% would net around $1.3 trillion over 10 years.[4] Corporations have not utilized tax cuts to the benefit of society– business investment continues to fall[5] while stock buybacks continue to soar[6], just the most recent evidence that “trickle-down” tax theory is a total sham.

Additionally, when examining the problem of declining corporate tax receipts, we urge the Committee to examine the problem of companies organized as “pass-through” entities too, where taxes are filed by the owners on an individual basis. The Joint Committee on Taxation estimated that millionaires stand to gain handsomely from the 20% pass-through deduction enacted as part of the TCJA– where almost a full half of the benefit will go to persons making $1 million or more, with that figure expected to surpass the halfway point by 2024.[7]  Yet, millionaires are only 0.3% of tax filers. This business tax provision seems equally ripe for reversal as the slashed corporate rate.

Moreover, recapturing lost corporate tax revenues means stopping the bleeding of government coffers by multinationals engaged in a global race to the bottom, utilizing tax haven countries to avoid paying taxes. While the OECD seeks to broker a worldwide solution to this ongoing problem[8], the Ways & Means Committee should also be taking steps to correct the problem of profit shifting. For example, the fact that the TCJA put domestic companies at an even greater disadvantage than they experienced under previous tax law by allowing deductions for multinational corporations that give a “50% off coupon” for profits said to be made by offshore branches coupled with provisions that can allow some multinationals to lower their US tax bills all the way to zero. And, because of the TCJA, multinational companies are now even more likely to make physical investments offshore, like building plants, in order to lower their taxes. According to the Congressional Budget Office (CBO), “By locating more tangible assets abroad, a corporation is able to reduce the amount of foreign income that is categorized as GILTI [global intangible low-tax income]. Similarly, by locating fewer tangible assets in the United States, a corporation can increase the amount of U.S. income that can be deducted as FDII [foreign-derived intangible income]. Together, the provisions [GILTI and FDII] may increase corporations’ incentive to locate tangible assets abroad.”[9] We urge this Committee to quickly act to mark up legislative solutions like the No Tax Breaks for Outsourcing Act (H.R. 1711), which equalizes the corporate tax rate for domestic and foreign-booked profits as well as other reforms, in order to take on profit shifting as part of the solution to recapturing lost corporate tax revenues.

In addition to increasing corporate tax rates and plugging the holes in the code that allow for profit shifting, the IRS should refocus its auditing and enforcement on top-dollar taxpayers, including corporations. High profile battles between the IRS and hulking tech giants like Microsoft and Facebook[10] go to show the lengths that individual companies will go in order to avoid the audit. However, a shrinking portion of American companies or the very wealthy are audited at all—especially when compared to the rates of audits for low-income individuals who receive the Earned Income Tax Credit. Instead of targeting persons who are barely getting by, the federal government would get far more bang for the buck if it focused on auditing corporations and the wealthy.

While we very much appreciate this Committee’s focus on the reduced revenues from corporate tax receipts, we hope that there will also be moves to roll back the provisions of the 2017 tax cut bill the benefitted the wealthy. It’s estimated that 83 percent of the benefits of the 2017 tax giveaways will go to the top 1%.[12] As many Americans continue to struggle to regain their economic footing more than ten years after the Wall Street crash and Great Recession and as economic inequality worsens, it was preposterous to reduce tax rates for the top earners in our society, down from 39.6 percent to 37 percent. Further, the TCJA weakened the estate tax by doubling the exemption limits, meaning far fewer estates are subject to the tax. The previous thresholds were already far too generous, and by increasing the exemption to more than $11 million (or $22 million-plus for married couples,) the TCJA further entrenched the ability of the “haves” in our society to hoard their wealth. Moreover, there are many low-hanging policy changes that could close glaring loopholes in the code that have been starving our national coffers for years. For example, the carried interest loophole, which allows investment fund managers to pay a lower tax rate than teachers or construction workers was barely touched in the TCJA. The same is true for the loophole that allows performance-based bonuses of more than $1 million dollars to be deducted by corporations for most employees receiving such exorbitant pay packages from financial firms or other hugely profitable companies.

And, moving forward, the tax debate should also be looking at creating new sources of progressive tax revenues such as by taxing Wall Street trades or implementing a Millionaires Surtax. A financial transaction tax of only 10 cents for every $100 traded would create around $777 billion in revenue over 10 years[13] and a Millionaires Surtax of 10% on the incomes of taxpayers making $1 million (or $2 million for couples) would conservatively raise $635 billion over 10 years.[14]  Other proposals to further increase top individual tax rates and to strengthen the estate tax must also be on the table. By unrigging the tax code, we would generate funds that could easily be channeled toward greater investments in our communities that will improve the lives of everyone, not just wealthy shareholders or corporate CEOs.

Since the passage of the 2017 tax cut law was heavily mired in the “swamp”—Public Citizen research revealed that more than 60 percent of all D.C. lobbyists weighed in on 2017 tax cut bill —more than 7,000 individual lobbyists,[15] it’s not surprising that corporations apparently used their outsized lobbying heft to unduly influence the TCJA rule-writing process as well.[16] That’s why it’s so critical for the Ways & Means Committee to hold hearings like today’s to investigate how corporations and the wealthy are reaping the benefits of the tax giveaways they have received. We look forward to future mark-ups of bills focused on rolling back the harmful tax changes put in place by the TCJA and making improvements to the tax code so that it works for everyone.

In America, equal opportunity should mean using taxes to pay for a hand up when you need it, not a handout to the profitable corporations and the rich who already have so much in comparison.  We look forward to working with you on a real tax plan that will benefit all Americans, not just the few who need it the least.

Sincerely,

/s/

Lisa Gilbert

Vice President of Legislative Affairs

Public Citizen

 

/s/

Susan Harley

Deputy Director

Public Citizen’s Congress Watch division

[1] Office of Management and Budget, Historical Tables, Table 2.2, Percentage Composition of Receipts by Source: 1934-2025 https://bit.ly/2SCKE65

[2] Id.

[3] [3] Matthew Gardner, Lorena Roque, Steve Wamhoff, Institute on Taxation and Economic Policy, Corporate Tax Avoidance in the First Year of the Trump Tax Law (Dec. 16, 2019) https://bit.ly/39syBib.

[4] Will Rice and Frank Clemente, Americans for Tax Fairness, Fair Taxes Now: Revenue Options for a Fair Tax System (April 2019) https://bit.ly/38Ljyjj.

[5] Sabri Ben-Achour, Business Investment Has Been Falling for Three Quarters. Should We Worry?, Marketplace (Jan. 30, 2020) https://bit.ly/3brqIvs.

[6] William Lazonick, Mustafa Erdem Sakinc, and Matt Hopkins, Why Stock Buybacks Are Dangerous for the Economy, Harvard Business Review (Jan. 7, 2020) https://bit.ly/2HddZys.

[7] Joint Committee on Taxation, JCX-32r-18: Tables Related to the Federal Tax System as in Effect 2017 through 2026 (April 24, 2018), https://bit.ly/2I0JDyX.

[8] Kimberly Clausing, Options for International Tax Policy After the TCJA, Center for American Progress (Jan. 30, 2020) https://ampr.gs/2UGLDVt.

[9] U.S. Congressional Budget Office, The Budget and Economic Outlook: 2018-2028 at 109-110 (April 9, 2018), https://bit.ly/2Jt8P1b.

[10] Paul Kiel, The IRS Decided to Get Tough Against Microsoft. Microsoft Got Tougher., ProPublica (Jan. 22, 2020) https://bit.ly/2SCG7jZ and Paul Kiel, Who’s Afraid of the IRS? Not Facebook., ProPublica (Jan. 23, 2020), https://bit.ly/2HcHQr2.

[11]Paul Kiel and Jesse Eisinger, Who’d More Likely to Be Audited: A Person Making $20,000– or $400,000?, ProPublica (Dec. 12, 2018) https://bit.ly/2VaueVe

[12] Distributional Analysis of the Conference Agreement for the Tax Cuts and Jobs Act, Tax Policy Center (December 18, 2017) https://tpc.io/2Bv5yLd.

[13] Congressional Budget Office, Options for Reducing the Deficit: 2019 to 2028, at 298 (Dec. 2018), https://bit.ly/2SNA0b1.

[14] Americans for Tax Fairness, Tax Policy Center Revenue Estimates for 10% Surtax (Oct. 15, 2019) https://bit.ly/2U4aORn.

[15] Taylor Lincoln, Public Citizen, Swamped (Revised Edition) (January 30, 2018) https://bit.ly/2FyuTV1.

[16] Naomi Jagoda, Senate Democrats Launch Investigation Into Trump Tax Law Regulations, The Hill (Jan. 16, 2020) https://bit.ly/2HeBQhs.