Answers to Tax Questions From A WP Reader

Given that it is tax day, today’s a great time for Winning Progressive to respond to questions about small business taxes and corporate tax rates sent in by reader Ellyn C.:

Question 1:

Mitt Romney claimed that the President’s budget proposal will raise taxes on small business, entrepreneurs and small corporations. He contends that it will kill job growth, as small businesses are the biggest job creators.  I thought Obama was only talking about the very top income bracket and largest corporations. What is the truth on this?  Will this effect the ability of small businesses to create jobs?

In response to President Obama’s recent budget speech, Multiple Choice Mitt has offered a variation on a conservative line of attack that PolitiFact has previously described as a “pants on fire” lie.  The lie is that President Obama’s proposal to return tax rates for incomes over $250,000 per year to the levels they were under President Clinton would increase taxes on most small businesses.  The simple fact is that President Obama’s proposal would not increase taxes on the vast majority of what are commonly referred known as small businesses, i.e. “mom and pop” restaurants, book stores, gas stations, construction companies, etc.

The deceit in the Republicans’ small business tax increase claim arises from two facts.  First, according to Congress’ non-partisan Joint Committee on Taxation, of the 32 million entities that report business income in the U.S., only 3% have any reported income over $250,000 per year.  In other words, only 3% of businesses would have any of their income subject to increased taxes under President Obama’s proposal.  Second, when Republicans speak of “small businesses” they are referring to any corporation that files under the individual tax code.  But the vast majority of such “small businesses,” and especially of the 3% that have income over $250,000 per year, are not “small businesses,” but instead are sole proprietorships such as bond traders, corporate law firm partners, etc. Such sole proprietorships technically count as small businesses for purposes of the tax code, but they frequently do not have employees and are certainly not the types of mom-and-pop shops that qualify as actual small businesses.

So, as President Obama explained, the wealthiest among us would be asked to pay their fair share in order to reduce the deficit and preserve core government programs.  Actual small businesses, however, would not.

Question 2:

What is the US corporate tax rate in comparison to other industrialized countries?  John McCain made a comment during the 2008 election that Ireland had a lower corporate tax rates and that US  companies were shipping jobs there as a result.

Conservatives like to point out that the official corporate tax rate in the U.S. is 35%, which is higher than in most other countries.  As U.S. Senator Mark Warner (D-Va.) recently said, however, “If you’re a major American company and you’re paying a 35 percent corporate tax rate, you need to fire your CFO (chief financial officer).”

The reason for this is that the U.S. tax code has so many loopholes and exemptions in it that the actual tax rate that most corporations pay is far less than 35%.  Through accelerated depreciation allowances, tax deferral rules, and the ability to shift income to lower tax countries and losses to higher tax countries, the average corporate tax rate in the U.S. from 2000 through 2005 was 13.4%.  That rate was far lower than in numerous other countries, including the United Kingdom (27.7%), France (20%), Japan (16.4%), and Canada (14.5%).  In addition, corporate taxes in the U.S. were only 1.9% of gross domestic product (“GDP”) from 2000 to 2009.  By contrast, in the 1950s corporate taxes in the U.S. were 4.7% of GDP.   By contrast, in 2002, corporate taxes made up 5.3% of GDP in Australia, 3.4% in Canada, 2.9% in France, 3.7% in Ireland, and 2.9% in the United Kingdom.   And, of course, many large corporations manage to get away with paying no corporate income taxes at all despite raking in billions of dollars in profits.

As we’ve discussed here, reforms to our corporate tax system are certainly needed, as all of these loopholes and exemptions create significant inefficiencies in our tax system.  But do not let the conservatives’ focus solely on the statutory corporate tax rate fool you into thinking that corporations are over-taxed in the U.S.

If you’d like to help dispel these conservative myths about taxes, please write a letter to your local newspaper editor and, if your letter gets published, enter it into the Winning Progressive Letters to the Editor Campaign.

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