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What to look for in proposed tax breaks

COMMENTARY | January 08, 2009

The middle class is suffering and can really use the tax breaks Obama has in mind for them, writes Martin Lobel. But the press needs to look carefully at legislation with an eye toward whether it will stimulate the economy or just increase the subsidies to the rich and powerful.

By Martin Lobel

Increasingly people in Washington are talking about using tax breaks to stimulate the economy but few are talking about the dangers. Targeted short term tax breaks for the middle class, which is really suffering in today's economy, make economic sense. However, such changes in the tax code should be combined with the elimination of tax subsidies for the very rich and the multinational corporations so we can lower the tax rate for everyone and cut into the looming deficit.

Our current tax code is so complicated that it is almost impossible to collect taxes from the very rich and the multinational corporations. The bulk of the burden has been shifted to the middle class because it is easy to collect taxes withheld from wages. But the middle class has not shared the prosperity of the very rich. According to the latest IRS statistics, the richest 1% of Americans in 2006 had the highest share of the nation’s adjusted gross income since 1929, while their average tax rate fell to its lowest level in 18 years. Since 2002, the average inflation-adjusted income of the top 1% of households increased by 42%, while the average inflation-adjusted income for the bottom 90% has  only risen about 4.7%.

Putting aside the question about the justification for taxing income from investment at a lower rate than income from labor, the evidence is overwhelming that the multinational corporations have been able to avoid U.S. taxes by shifting their profits to low- or no-tax countries by means of transfer pricing. Every IRS Commissioner who has testified before Congress, including the current one, has said it is impossible to police transfer pricing. The classic example was Microsoft’s ability to save $300 million in taxes by renting desk space in an Irish solicitor’s office and transferring royalty rights to its Irish “subsidiary.” Is it any wonder that most of the decline in corporate tax rates is attributable to an increasing share of their profits being reported in low-tax jurisdictions?

Right now, when the country needs all the tax revenue it can get, the multinationals are pushing to make it easier to shift profits abroad by replacing the Generally Accepted Accounting Principles we now use with International Financial Reporting Standards, which allow much greater “flexibility.” Aside from the revenue itself, such a shift would increase the advantage the multinationals have over domestic corporations against whom they compete.

The press should examine carefully the tax proposals that are put forth to see if they will help stimulate the domestic economy or just increase the subsidies to the rich and powerful. They need to ask, in light of the increasingly global economy, why we are not going to a worldwide tax system, sometimes called combined reporting, that would eliminate shifting profits overseas. They also need to ask whether it wouldn’t be far more stimulative to eliminate most of the corporate tax subsidies and lower tax rates on everyone.

Combined reporting and so on
Posted by Nicholas Shaxson
01/09/2009, 01:56 PM

Great article. For those interested in these subjects - combined reporting, low tax jurisdictions, International Financial Reporting Standards, and plenty more - there is a wealth of information here: www.taxjustice.net ...- and a (growing) document archive here: http://www.taxjustice.net/cms/front_content.php?id ...

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