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LET’S TALK ABOUT THE NUMBERS: It’s been a key part of President Joe Biden’s argument for hiking taxes on corporations — current revenue collections from big business are out of whack.
That goes for the U.S., as a historical measure: “Over the past three years, corporate tax collections have fallen to their lowest level since World War II: 1% of gross domestic product,” Treasury Secretary Janet Yellen wrote in the second sentence of her recent Wall Street Journal op-ed.
And it goes as a comparison to other major economies: “Although U.S companies are the most profitable in the world, the United States collects less in corporate tax revenues as a share of GDP than almost any advanced economy in the Organization for Economic Co-operation and Development (OECD),” as Treasury put it in the executive summary for Biden’s tax plan.
But as a number of commentators have pointed out, those kinds of arguments ignore a very key aspect of tax policy in the U.S. — the explosion of pass-through businesses over the last several decades.
In fact, the U.S. has a vast array of businesses that don’t organize as traditional corporations, far more so than our major trading partners. Businesses in the U.S. have flocked to becoming pass-throughs in large part because they are taxed only through their owners’ returns as individuals. On the other hand, corporations have two layers of tax — the corporate rate, and the taxes paid by shareholders.
And those companies aren’t just the local hardware store or people selling products on eBay — it’s also big law firms and hedge funds. (A very large chunk of pass-through income goes to the top 1 percent of taxpayers.)
MORE ON THAT IN A BIT, but welcome to what would normally be the almost Tax Day version of Weekly Tax. And you know what, people said they were getting tired of Zoom.
Yea, you’ve probably heard of this one: Today marks a dozen years since the U.S. Navy rescued the captain of the Maersk Alabama cargo ship after it was hijacked by pirates. (Why yes, that would be “Captain Phillips.”)
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ALL OF WHICH IS TO SAY…: How should America’s robust pass-through sector influence how we examine the size of America’s corporate tax collections and recent trends about corporate revenues?
For starters, Eric Toder of the Urban-Brookings Tax Policy Center said that Republicans cutting the corporate rate from 35 percent to 21 percent in the 2017 tax law, H.R. 1 (115), and enacting more generous write-offs for investments caused the drop in collections in recent years.
“That change really has nothing to do with the pass-throughs,” Toder says. The explosion in pass-throughs was real, Toder added, but “not enough in the last couple of years to explain that.”
But trying to compare corporate tax collections here to the rest of the OECD is a trickier proposition, because of all the pass-throughs.
That’s because there’s no easy way to make an apples-to-apples comparison between the corporate sector here and in other major economies. Other countries have sole proprietorships. But S corporations aren’t really found elsewhere, and the U.S. has more partnerships than other countries, as Toder noted.
The end result, Toder said, is that he doesn’t know of any in-depth comparison between the U.S. and other countries on that front— and added that it wouldn’t be all that easy to pull off, should someone want to.
This all brings up a related note, too: Biden proposed scrapping the 2017 tax law’s 20 percent deduction for pass-through income for higher earners during the campaign. But the administration didn’t include that idea (or any proposals for pass-throughs) in the package of corporate tax increases, though there are more tax hikes to come on the individual side.
It’s also too soon to know how (or if) all of Biden’s various priorities would get packaged together. Still, some tax experts believe that the best approach is for policymakers to examine and change provisions for pass-throughs and corporations in tandem.
“The sounder view is to look at business taxes generally, instead of looking just at the corporate sector,” Michael Graetz, a Columbia law professor, told Morning Tax recently.
LETTER WRITING CAMPAIGN: Reps. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, and Mike Kelly (R-Pa.) just sent a string of letters over their concerns about turning the Child Tax Credit into a monthly payment.
Brady and Kelly are pressing IRS Commissioner Chuck Rettig about the agency’s time frame for setting up a monthly payment system for the refundable credit, which Democrats were pushing to start in July. (For his part, Rettig has suggested that would be a challenge, given everything else facing the IRS these days.)
But the real purpose of the GOP lawmakers’ four letters is to ask about what the federal government would be able to do to tamp down improper payments in the expanded program, pointing to problems with both the Earned Income Tax Credit and the Additional Child Tax Credit.
Brady and Kelly not only asked Rettig about that — they also requested that both Treasury’s inspector general for tax administration and the Government Accountability Office report back to them about the program’s implementation. And finally, the two Republicans wrote to Gene Sperling, the administration official in charge of implementing all of the Democrats’ coronavirus response, about their “deep concerns” about the monthly child allowance.
“We have already seen how well-intended programs can lead to massive levels of fraud without proper safeguards and oversight,” Brady and Kelly wrote to Sperling.
On some level, this is all part of a pattern. Lots of Republicans for years have pointed to erroneous payments for refundable credits, be it through fraud or more honest mistakes, as a reason not to expand programs like the EITC or CTC. (Republicans did make the CTC larger during the 2017 tax law, but definitely not without a hassle.)
It’s also worth noting that improper payments from refundable credits are just a small percentage of the tax gap, the difference between taxes paid and taxes owed. (On a related note, Democrats have also had their own concerns that the IRS is disproportionately auditing EITC recipients.)
THE VIEW FROM THE OTHER SIDE: It shouldn’t be much of a surprise that Ireland — home to both a 12.5 percent corporate tax rate and of lots of Silicon Valley subsidiaries — would have reservations about some of the recent global tax proposals coming out of the Biden administration. But it’s also interesting to note that tax experts in Ireland are expecting (and bracing) for a global minimum tax rate as part of the tax negotiations being run through the Organization for Economic Cooperation and Development. Peter Vale of Grant Thornton told the BBC that was his current thinking, though he also believes any rate would end up in the teens — not the 21 percent proposed by Biden. Other experts there say they don’t believe that major powers wanted countries like Ireland to prosper from previous OECD initiatives, like the Base Erosion and Profit Shifting project, or BEPS. Ireland saw its corporate tax revenues triple between 2013 (when BEPS kicked off) and 2020, and another Irish corporate expert, Seamus Coffey, said he thought major powers viewed the latest OECD initiative as a way to correct that trend.
DIDN’T QUITE MAKE IT: As it turns out, Republicans in West Virginia never could come together about a big income tax during their just completed legislative session. But that session did end with a bang, as WV MetroNews points out: The state House voted down Gov. Jim Justice’s income tax proposal on Friday by a 100-0 vote, after the governor chided them for not considering the measure. So now what? Justice has said he’s going to keep publicly campaigning for a big income tax cut, after making that a centerpiece of his agenda this year. Plus, top Republicans in the legislature have suggested that it was always more likely than not that the state would need more than one legislative session to pass such a massive change — not only cutting income taxes, but making up lots of the revenue with higher sales taxes. And there was some progress: The state Senate narrowly passed a measure marrying income tax relief with higher sales taxes last week.
Biden is calling for a historic increase in IRS funding.
Democrats are doing what they can to sell the new covid relief package.
Senate Finance Chair Ron Wyden (D-Ore.) backed Treasury’s international tax proposals.
CNN: “Jeff Bezos endorsed higher corporate tax rates. But it won’t cost him much.”
“Captain Phillips” was nominated for six Oscars, but didn’t win any.