Declining Corporate Tax Revenue Underscores Need for Reform

Thursday, 14 Aug 2014 03:14 PM

By Jennifer G. Hickey

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Declining corporate tax revenues and the increasing number of firms relocating overseas are adding urgency to calls for an overhaul of the nation's corporate tax system, say analysts and advocates.

"Given the importance of corporations to the economy, and given their recent profit levels, the extent to which they actually contribute is below what they can and should," Reuven Avi-Yonah, a professor at the University of Michigan Law School, tells The Hill.

According to a February Congressional Research Service report, corporate tax as a federal revenue source has declined from 32.1 percent — its post-WWII peak in 1952 — to 9.9 percent in 2012.

"The decline in corporate revenues is a combination of decreasing effective tax rates, an increasing fraction of business activity that is being carried out by pass-through entities (particularly partnerships and S corporations, which are not subject to the corporate tax), and a decline in corporate sector profitability," the CRS report, The Corporate Income Tax System: Overview and Options for Reform, notes.

The CRS cites several reasons for the declining revenues from corporate taxes, including a decrease in the average effective corporate tax rate as a result of reductions in the statutory rate, and an erosion of the tax base as a result of an increase in the percentage of business that is being performed by "pass-throughs," such as partnerships and S corporations.

Lastly, CRS says corporate-sector profitability has fallen over time, which also has eroded the corporate tax base.

In addition to declining revenues, analysts are concerned about the rising number of corporate inversions, which is the practice in which a U.S.-based company merges with a smaller foreign business so that it can use an overseas address for tax purposes.

About 50 inversions have occurred through 2013, 20 of them since 2011, according to Elaine Kamarck and Jim Pinkerton, the bipartisan leaders of the RATE Coalition, a group that advocates for corporate tax reform.

The duo believe "the most important economic goal in the near term should remain the simplification of the tax code and a more competitive rate," rather than "short-term, punitive patches that would make the current system even more complex, cumbersome, and counterproductive."

The United States has the highest nominal corporate tax rate among developed countries, with a 35 percent top federal rate and a 39.1 percent average combined rate, according to the Tax Foundation.

Conversely, in many developed countries, their corporate rates have declined from almost 45 percent in the late 1980s to today's rate of 25 percent.

While President Barack Obama has frequently attacked companies that have profited from off-shore mergers as "unpatriotic," he is not responding to pressure to return donations he has received from some of those companies, reports Bloomberg News.

The White House's refusal to return those contributions has angered members of Congress who are attempting to reign in corporate inversions.

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