Breaking the Code: End Tax Perks Corporations Don't Need

new report from the Citizens for Tax Justice confirms what Occupy Wall Street protestors and progressives more generally have been saying for a while now: Economic inequality is neither an accident nor an inevitable outcome of the free market — it is, to a large extent, the product of government policy.

The report gives us new, hard numbers that reveal just how wastefully corporate tax loopholes redistribute wealth from working Americans to the most profitable businesses in the United States. From 2008-2010, the wealthiest 280 corporations made on average over $48.3 billion per year and paid an average effective tax rate of 17.1% — by comparison, the average household in the U.S. earns approximately $52,673 per year, yet pays a tax rate of 20.4% (according to 2007 CBO and Census figures). In 1955 the federal government raised 27% of its revenues from corporate taxes; now it raises under 10%

What makes this new report particularly important, however, is not so much the figures that it cites but the emphasis its places on specific loopholes that are often left out of the popular discussion on corporate welfare. Rather than commonly-noted loopholes like offshore tax shelters, this report places front and center the biggest loophole on the books: the accelerated depreciation exemption.

This exemption allows companies to deduct from their taxable income the value of a capital investment at a faster rate than the capital actually depreciates. So, if wear and tear gradually causes the value of a new machine to deteriorate over the course of, say, seven years, the accelerated depreciation deduction allows companies to deduct the total value of that investment from their taxable income by the end of the first two or three years after its purchase, "accelerating" the rate at which the company benefits from the deduction.

Here's the problem: the Joint Committee on Taxation estimates that this deduction costs the federal government between $500 and $600 billion over 10 years. That's a massive sum — basically half of the total amount that Congress is frantically trying to figure out how to cut from the budget right now — and we're handing it over to corporations that are making record-level profits.

But the nonsense doesn't stop there. Not only do corporations not need the special handout in order to turn a profit — it's also not clear that capital investment is the most important part of the economy to be supporting right now.

The owners of capital are doing extraordinarily well these days. They are sitting on $2 trillion in cash and grabbing an ever larger share of the national income. In 1990, about 63% of national income went to labor compensation. In 2005, the total share dropped to 61%. By the middle of this year, labor was taking home only 58 percent of national income.

Given all this, why should capital be getting such a big helping hand from the taxpayers? Wouldn't it make more sense to take the $500 billion that's currently going to accelerated depreciation deductions and spend it instead on support for America's workers who are increasingly getting left in the dust?

In fact, providing support for labor force expansion is precisely what President Obama is proposing right now: the next piece of his jobs plan, to be considered by Congress early next month, is a payroll tax deduction. The CBO's most recent analysis of Obama's jobs proposal demonstrates unequivocally that, dollar for dollar, hiring incentives like a payroll tax deduction would provide a substantially greater degree of support for job creation than incentives for capital investment.

But cutting back on wasted tax dollars is not the only matter at stake here. There's also a matter of principle: How can the U.S. seriously claim to be an inclusive democracy when the tax code caters to the powerful owners of capital at the expense of everyone else?

Photo Credit: Mike_fleming

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Jack Temple

I am currently a Communications and Social Media Strategist at Demos: Ideas and Action in New York City. I also blog regularly at PolicyShop.net.

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