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Posted at 9:37 AM ET, 01/28/2011

Why corporate tax reform will be hard, in one graph

By Ezra Klein

Binyamin Appelbaum, as an addendum to this sobering look at the realities of corporate tax reform, points to the work of NYU's Aswath Damodaran, who has compiled a rough estimate of the effective tax rates in various industries. You might already anticipate that the rates vary. But not that they vary this much:

taxratescorporate.jpg

You can see more of the data here (warning: Excel doc), if you'd like. But the basic takeaway is that there are plenty of industries that are benefiting from the current corporate tax code, and are likely to fight like hell to preserve the breaks they're currently getting. Moreover, as Appelbaum notes, a lot of these industries are the sympathetic ones: "High-tech industries pay relatively little in taxes. Utilities and other infrastructure providers pay some of the highest rates. ... Mr. Damodaran says much of the difference is a question of life cycle. Young industries tend to be plowing more of their revenues into research and equipment and other kinds of spending that the government rewards with tax breaks."

And that's really what corporate tax reform will be about. "Loopholes" sound like bad things. "Incentives to plow more revenues into research and development and equipment" don't. Nor do tax breaks to locate manufacturing in America. But that's the sort of stuff we'll have to get rid of to substantially lower the rates in a revenue-neutral way. And this conversation, remember, is going to happen inside a political system that can't even decide to tax the earnings of hedge-fund managers like income.

By Ezra Klein  | January 28, 2011; 9:37 AM ET
Categories:  Taxes  
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Comments

If the democrats are going to turn this into an intelligent partisan deathmatch for the cameras, then I would retain some hope for nabbing some of the low hanging fruit. Gunning for oil producers is a fight that they probably wouldn't mind allowing to drag on and on. And a congress with nothing better to do could be more inclined to take on issues like the hedge fund issue or crack down on credit card fee exploitation.

Posted by: theamazingjex | January 28, 2011 10:00 AM | Report abuse

Ezra says:
"And this conversation, remember, is going to happen inside a political system that can't even decide to tax the earnings of hedge-fund managers like income."

Keep an eye out for pigs flying over your head today. I finally found some common ground with Ezra, I think.

I'm a finance professional, and any previous readings of Ezra's boards will tell you I'm quite conservative...but even I agree that the loophole hedge fund managers are exploiting to tax their income at the (lower) capital gains rate instead of at the income tax rates like everyone else has to pay is simply a mockery of fair play, and has bothered me for some time.

Where Ezra and I might depart is that I think the top income rates should be pulled down closer to the cap gains rate, whereas I presume Ezra would like to jack the cap gains rate back up to 40%-50% since progressives know how to spend that money better than we do, right?

By why ruin this post with more partisanship. At least I finally agree with Ezra on a fundamental point, that hedge fund manager income should be taxed as personal income. Welcome to some brief civility today....

Posted by: dbw1 | January 28, 2011 10:16 AM | Report abuse

G.E AND THE NEW INSIDE MAN IN OUR WHITE HOUSE WILL GET THE BEST DEALS , EVEN THROUGH THEY JUST GOT BAILED OUT BY THE TAX PAYER, RECEIVED MAJOR AMOUNT'S OF STIMULUS FUNDS THEN FIRED AMERICAN WORKERS AND OPENED UP AND HIRED WORKERS IN MEXICO,
G.E AND THE INSIDE MAN HAVE NO RIGHT TO BE IN OUR WHITE HOUSE, I SAY CONFLICT OF INTEREST HE HAS TO GO.

Posted by: FREEDOMFROMGOV | January 28, 2011 10:36 AM | Report abuse

great post Ezra. Now we'll know who will be fighting tax reform.

Posted by: visionbrkr | January 28, 2011 10:37 AM | Report abuse

I'm no expert on these things, but the trend that stuck out to me from that chart is that the the industries paying the highest effective tax rates are those whose operations are mainly or exclusively domestic. As you go down the list, you get more operations and more revenue OUS, creating more opportunities for tax strategies.

Posted by: amiller5 | January 28, 2011 10:39 AM | Report abuse

Google effective Corporate tax rates, and one might see where many firms pay zero, and the average is something like 3-4%. These are at serious odds with the graph.

Not to say who is right or wrong, but would someone like to address this discrepancy?

Posted by: grat_is | January 28, 2011 10:41 AM | Report abuse

Ezra, you don't truly believe that the drug industry is pouring all those tax savings into research and development, do you? No one has believed that for quite some time. I'll just quote from a Marcia Angell article from the New York Review of Books from a while back:

"But while the rhetoric is stirring, it has very little to do with reality. First, research and development (R&D) is a relatively small part of the budgets of the big drug companies—dwarfed by their vast expenditures on marketing and administration, and smaller even than profits. . . . Second, the pharmaceutical industry is not especially innovative. As hard as it is to believe, only a handful of truly important drugs have been brought to market in recent years, and they were mostly based on taxpayer-funded research at academic institutions, small biotechnology companies, or the National Institutes of Health (NIH). The great majority of “new” drugs are not new at all but merely variations of older drugs already on the market. These are called “me-too” drugs. The idea is to grab a share of an established, lucrative market by producing something very similar to a top-selling drug."

http://www.nybooks.com/articles/archives/2004/jul/15/the-truth-about-the-drug-companies/

I need more hard proof that the tax breaks are going into development and research instead of profits, and especially that those investments benefit the public.

On the other side of the coin, that utilities pay the highest rates seems curious. Every member of our society must have electricity, and the cost of those high rates get passed directly to the consumer. Governments must then turn around and help the neediest members of society by providing assistance and subsidies.

Posted by: JJenkins2 | January 28, 2011 10:42 AM | Report abuse

"Nor do tax breaks to locate manufacturing in America."

Is there any indication that tax code meant to incentivize this is working now?

Posted by: Kevin_Willis | January 28, 2011 11:02 AM | Report abuse

"And this conversation, remember, is going to happen inside a political system..."

You know, we went through this when Reagan was president. They lowered the taxes and wiped out the loopholes. Then a couple years later, all the loopholes were reinstated.

Same. Old. Arguments.

Posted by: leoklein | January 28, 2011 11:09 AM | Report abuse

It is time to eliminate the corporate income tax. Doesn't work, anyway.

Posted by: krazen1211 | January 28, 2011 11:15 AM | Report abuse

"But the basic takeaway is that there are plenty of industries that are benefiting from the current corporate tax code, and are likely to fight like hell to preserve the breaks they're currently getting."

It will be easy if you simply stop taxing business.

Posted by: justin84 | January 28, 2011 11:27 AM | Report abuse

@leoklein,

as a conservative I could make the same arguments regarding (admittedly WILDY off topic) illegal immigration.

Posted by: visionbrkr | January 28, 2011 11:27 AM | Report abuse

"Incentives to plow more revenues into research and development and equipment don't. Nor do tax breaks to locate manufacturing in America."

Actually, they both sound like bad things to me. If the R&D or equipment appears to be a good investment, go for it. If not, don't come begging for a handout. And it would seem logical that tax breaks to locate manufacturing in America would go mostly to businesses that would locate here anyway.

Posted by: ostap666 | January 28, 2011 11:30 AM | Report abuse

Does anyone know how much actualy revenue is generated by the current corporate tax regime?

Considering the huge investment corporatations invest in compliance, there must be a better way to tax raise revenue and save on resources.

VAT hello? This may not be the answer, but a fixed fee could solve issues on both ends, compliance and revenue.

Each IRS code section has an army of lobbyists supporting whatever benefits can be had, this could be a first step

Enjoy

Posted by: johnm12 | January 28, 2011 12:10 PM | Report abuse

for some slightly dated but grim (and contradictory details) see http://www.reclaimdemocracy.org/corporate_welfare/real_tax_rates_plummet.php

If corporate income taxes were eliminated, wealthy individuals will just shift to a corporate structure for much of their income.

Posted by: ncaofnw | January 28, 2011 1:48 PM | Report abuse

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