Do U.S. Corporations Pay Their 'Fair Share?'

As usual, the left is wondering whether corporations pay their “fair share.”  This time, it seems they may have a point.  As Timemagazine reported yesterday, a recent Wall Street Journal study of Congressional Budget Office statistics showed that American corporations paid an effective tax rate of 12.1% last year.  That’s the lowest number in four decades, despite a nominal tax rate that runs 35%, second only to Japan’s 39.5%; if you include state corporate taxes, America is now number one in the world.

So why the low effective tax rate?  According to both the Journal and Time, it’s due to a corporate tax break set into the stimulus package, which allowed corporations to use an accounting trick: they could take write-offs on capital investments all at once rather than over time.  Typically, you take a tax write-off as the value of a good depreciates – if you buy a computer, it loses value over time, and you write that in your tax returns.  Under the stimulus package, you were allowed to basically write off the whole purchase.  The result was huge write-offs for corporations.

Now, normally, this wouldn’t be a bad thing.

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We’d expect corporations to take that money and dump it back into the economy by hiring and producing new products.  But that hasn’t happened – largely because this is a tax break rather than a permanent tax situation.  In other words, at some point, we’re going to go back to the old system, taxes are going to hike, and the corporations are saving up for a rainy day.

The rainy day is due to come soon.  As Time notes, “While 2012 will be a year of gridlock in Washington, tax reform will be on the top of the agenda for the President and Congress after the election, with corporate tax rates and loopholes a major target of reform.”  “Fairness” will triumph over good business sense, and we’ll see a major economic slowdown.  This is where Time goes wrong – the notion that fairness should dictate tax rates rather than what is productive for the economy as a whole.

And this is the problem with stimulus: it’s always frontloaded.  Until we dump the corporate tax altogether – which really would be fair, since the corporation gets taxed, then pays its employees, who are taxed, too – we’re going to get this bizarre system of deductions and loopholes that only the very wealthy corporations can afford.