Editorial: An urgent need for tax reform
Two dogged members of Congress, Sen. Max Baucus, the Montana Democrat who heads the Senate Finance Committee, and Michigan Republican Rep. David Camp, chairman of the House Ways and Means Committee, are committed to making major reforms to the nation’s 4-million-word tax code this year. The unwillingness to compromise on the part of House Republicans makes success unlikely. But demand for change by a disgusted public could make it happen.
Gallup, in a poll taken earlier this month, found that the percentage of Americans who believe they are taxed fairly hit its lowest level since 2001: 55 percent. It was only that high because not enough taxpayers know how unfair and riddled with abuse the nation’s tax system is. The worst abuses occur at opposite ends of the spectrum.
At one extreme, corporations and the rich minimize or escape their tax liability with the help of experts and lobbyists who win preferred tax treatment for their clients. The effective corporate tax rate is roughly half the 35 percent rate on the books, thanks to exemptions and loopholes.
Changing their corporate structure to become a real estate trust is the latest strategem companies are pursuing to reduce or avoid taxation. Such trusts are usually exempt from federal taxes. One such company is the prison operator Corrections Corp. of America; another, Penn National Gaming, is the operator of 22 casinos.
This month in The New York Times, Rutgers history professor James Livingston described the ever-shrinking role corporate taxes have paid in funding government. The poster child is G.E., which in 2010 earned $14.2 billion but paid zero in U.S. corporate taxes. In the 1950s and ’60s corporate taxes accounted for about one-third of the nation’s revenue. They now account for just 9 percent. The difference, Livingston explained, has been made up by working stiffs in the form of payroll taxes, a regressive levy that now brings in about one-third of all federal revenue.
Baucus’s and Camp’s reform proposals would close many of the loopholes that allow companies to minimize or escape taxation, while lowering the nominal 35 percent corporate tax rate. The duo promise that under their reform plan low- and middle-income taxpayers will pay no more than they do now. While that’s nice, it’s not going to be good enough. Those taxpayers have been overpaying for decades because corporations, hedge fund managers and others have been paying far too little. The plan should ensure that they see a gain through a reduction in payroll taxes.
Reforms at the other end of the tax spectrum will be harder to achieve. Many economists have noticed that, while the nation’s unemployment rate remains high at near 7.6 percent, consumer spending is at a level commensurate with a rate of 5 or 6 percent. The reason, they believe, is that the recession and a change in company hiring practices that favors independent contractors, has driven many more people into the underground economy whose workers pay no income taxes – but also earn nothing toward Social Security. The vast majority of nannies, for example, are paid off the books, as are millions of construction workers and workers in fields that range from day labor to professional consulting.
The shadow economy could be as big as
$2 trillion and the loss to the treasury $400 million or $500 million. That’s more than enough, if collected, to put a big dent in the deficit. Getting off-the-books workers and employers to pay up will be a challenge, but steps to do that should be part of any tax reform. People don’t mind paying their share as long as they know they’re not getting the short end of the stick, which is what the current tax code gives most of them.