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Bob Moon: On paper, the corporate tax rate in this country is one of the highest anywhere — 35 percent. It’s long prompted calls for reform. And the president got on that bandwagon in his State of the Union speech.
But as New York Times columnist David Leonhardt points out in the paper today, there’s a paradox: The taxes that some big corporations pay really aren’t so high. In fact, they’re quite small considering. Hello David.
David Leonhardt: Hi.
Moon: So you report that Boeing paid a total tax rate of just 4.5 percent over five years, Southwest Airlines a little over 6 percent, Yahoo 7 percent, and even mammoth General Electric just a little more than 14 percent. Any idea how it is that particular companies seem better at avoiding taxes than others?
Leonhardt: Some companies just hire really good lawyers and tax experts. General Electric is famous for that. They’re known as having one of the best tax departments in the world and they’ll look for any advantage to get out of paying taxes — whether it’s putting some income overseas, whether it’s taking advantage of some loopholes that you and I have never heard of. Then beyond that there are a couple of common reasons. The most defensible, I think, is that some companies lost large amounts of money in prior years. Yahoo fits that description, so does Amazon. And so they’re still deducting those losses. Another one, which I think is less defensible, is that if you invest a lot of money in expanding, you get to reduce your taxes.
Moon: That’s kind of the goal of businesses, though, right?
Leonhardt: Well expanding is the goal of businesses, but from the standpoint of our economy, we want our resources used in the most efficient way. And if an airline has an incentive to do more expansion or a drug company has an incentive to do more research because of the tax code, they’re going to do more than ends up being efficient for the economy as a whole. And we’re going to end up having drug companies doing lots of research that in fact doesn’t pay off, which in fact we’ve had. We’re going to have too many planes bought. And that will be because once you take into account the tax break, it can be profitable to do something that otherwise would not be profitable.
Moon: Your analysis comes as the government goes deeper and deeper in debt. I came away from reading your column with the idea that the corporate income tax is an untapped source of revenue. And you write that it has been in the past?
Leonhardt: It is something of an untapped source of revenue. Now the problem, of course, is that businesses want to see their taxes cut. So form a lobbying standpoint, from a political standpoint, it’s going to be quite difficult to raise corporate taxes. But from an economic standpoint — given the kind of deficits we’re facing over the long term, mostly because of Medicare — I think there’s a very strong case for reducing the rate, but also eliminating even more deductions. So the net effect would be a fall on the rate, but still a net increase in corporate taxes.
Moon: On the other hand, we have free-market forces consistently arguing that taxing corporations stymies business growth and can actually lead to bringing in less revenue.
Leonhardt: That’s possible. But it’s worth remembering that while we could get taxes to a point where they would really damage economic activity, the argument that higher tax rates, no matter what, lead to worse economic growth is an argument that looks very bad today. That’s what we heard in the 90s when Congress and President Bill Clinton raised taxes. After that we had an economic boom. We heard the reverse over the past decade. The tax cuts of 2001 and 2003 would lead to a great economic surge, and instead we have the slowest growth of any decade since World War II. So tax rates matter, but they don’t matter nearly as much as people often suggest.
Moon: You end your column with this observation: Any system that creates as many winners as this one won’t be changed easily. Let me see if I can take you beyond that. Do you see any scenarios where this might be changed, particularly given the current makeup of Congress?
Leonhardt: I think it’s very unlikely, but sure, you could come up with a scenario. I mean, the story of the 1986 tax reform signed by President Reagan — which was really a very good bill — they same thing you could have said back then, which is how is this ever going to happen? It requires overcoming a huge number of special interests. So there are times in the political moment in which you can have changes that hurt special interests and is for the larger good, but they’re relatively rare and this doesn’t seem likely to be a moment where we’re going to see that.
Moon: You can read David Leonhardt’s column in today’s New York Times. Thanks for joining us, David.
Leonhardt: Thank you, Bob.
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