Here’s an idea: Why not tax corporations as if they were natural persons, in accordance with their newly discovered rights of free speech? That move would solve any impending fiscal crisis.
Indeed, we used to do just that. For most of the 1950s, corporate income at large companies was taxed at 52 percent, according to the nonpartisan Tax Policy Center. The federal government collected about a third of its revenues from this source. Today, thanks largely to “reforms” ushered in by President Ronald Reagan, the ostensible tax rate on corporate income is no higher than 35 percent — and the corporate-tax share of federal revenue has fallen to about 9 percent.
Consider General Electric. Back in the 1950s and early ’60s, when Mr. Reagan was a company pitchman, GE made consumer appliances. It employed hundreds of thousands of people, and it paid millions in taxes every year. Now, it makes jet engines, wind turbines and other capital equipment, but its real profit center is financing the sale of these products overseas — because income generated here is tax-exempt if it remains offshore.
In 2010 GE employed more than 130,000 people in the U.S., and earned $14.2 billion, $5.1 billion of which was generated in the U.S.. Yet its U.S. tax bill for that year, according to a report by The New York Times, was zero. (GE said last year that its “global tax rate” in 2010 was 7 percent, but did not disclose how much of that went to the IRS.)
Meanwhile, federal spending increased with the growth of the welfare state. As corporations lobbied and learned to avoid taxes, the government closed the revenue gap with payroll taxes. These were negligible before creation of Medicare in 1965, but they now account for more than a third of federal revenue. In effect, they replaced the income taxes corporations once paid. Personal income taxes, which have stayed at about 45 percent of federal revenues since 1950, and payroll taxes now provide the government with almost 80 percent of its yearly revenue.
Unlike personal income taxes, Medicare and Social Security taxes — which are jointly known as FICA (Federal Insurance Contributions Act), or payroll taxes — are regressive. Because of the payroll cap on Social Security contributions, the bottom 20 percent of income recipients pays a 7.3 percent FICA rate, while the top 20 percent pays a 6.8 percent rate and the top 1 percent of earners pays just 0.9 percent.
So, by slashing corporate income taxes and forcing a new reliance on payroll taxes to finance government spending, we have redistributed income to the already wealthy. Our tax system has fostered inequality.
The fiscal problem we face is not, then, a lack of revenue sources. We can finance any amount of transfer payments and “entitlements” by taxing corporations’ profits as we tax personal income, using a progressive formula. If necessary, give them a mortgage deduction — they already get something like it in the form of accelerated depreciation on purchases of capital equipment — but make them pay higher taxes on their income. Do that, and the deficit goes away.
The now-familiar objection to a tax increase on corporate profits is that it will discourage investment and dampen job creation. The retort is just as obvious: Since when have tax cuts on corporate profits led to increased investment, faster job creation and higher per capita consumption out of rising real wages? It didn’t happen after the Reagan Revolution, it didn’t happen during the Clinton boom, and it sure didn’t happen under George W. Bush.
Nor is it happening now, as profits soar and full-time job creation languishes. American corporations are sitting on $4.75 trillion in cash, according to the Federal Reserve Bank of St. Louis.
The other well-worn objection to an increase of corporate income taxes is that it would encourage companies to invest and hire overseas, where tax rates are presumably lower. Here, too, the retort is obvious: the tax code already works exactly this way, by postponing taxes until profits from investment overseas are repatriated.
In view of these facts, there’s no downside to replacing payroll taxes with increased taxes on corporate profits, wherever they’re made or held. By doing so, we make the tax code more progressive, and mobilize capital that is otherwise inert. We could lay solid foundations for economic growth simply by going back to the tax principles we used to have. What could be more conservative than that?
James Livingston, a professor of history at Rutgers, is the author of “Against Thrift: Why Consumer Culture Is Good for the Economy, the Environment, and Your Soul.” He wrote this for The New York Times.