A comprehensive study of the first year of President Trump and the Republican party’s “Tax Cuts and Jobs Act,” one of the largest tax cuts in U.S. history, found that the law did nothing to curb corporate tax avoidance – disappointing those hoping for progressive corporate tax reform. Ninety-one companies among the Fortune 500 paid no taxes on U.S. income in 2018 and other profitable companies paid a collective effective tax rate of just 11.3 percent, which is barely more than half the 21 percent rate established by the tax law.
The study titled, “Corporate Tax Avoidance in the First Year of the Trump Tax Law,” conducted by the Institute on Taxation and Economic Policy, concluded that the 11.3 percent effective tax rate is “likely the lowest effective tax rate in the last 40 years.” The Trump tax cuts that disproportionately benefited the nation’s wealthiest one percent and major corporations, did little to benefit working families. Now with less tax revenue being generated, the Trump administration and Republicans are advocating cuts to Social Security, Medicare, Medicaid, food stamps, education and other vital social programs. While the tax cuts triggered a brief spike in economic growth, they also produced a nearly $1 trillion-dollar federal deficit.
Between The Lines’ Scott Harris spoke with Matthew Gardner, senior fellow with ITEP and lead author of the group’s new report. Here, he summarizes the report’s findings as well as recommendations to address the gross inequities in the U.S. tax code.
MATTHEW GARDNER: What we’ve found is that in the wake of what looked on paper to be one of the biggest corporate tax cuts in a quarter-century, big profitable companies are still finding ways — even at the sharply lower rate we have now — of avoiding that rate. So we’re in a situation now, as we were two years ago where whatever the sticker price is, whatever the legal tax rate is, companies are on average paying maybe half of that. So, this is a shame because the hope a lot of us had two years ago was that when Congress signaled that it was going to deal with corporate tax reform, that it would deal with two things at the same time. It would deal with our corporate tax rate, which some critics saw as unnecessarily high — and was certainly among the highest around. At the same time, we’d get rid of the huge array of corporate tax loopholes that made it so that companies never had to pay that tax rate, trying to get to a place where companies were paying the sticker price. And this study shows pretty clearly that one year in, it’s just not happening that way. We don’t appear to have made any progress towards corporate tax reform.
SCOTT HARRIS: Now, I read that the share of corporate taxes in the federal revenue stream has declined from 4 percent not that long ago to 1 percent today. And I wondered if you would discuss that in addition to how the tax system in the United States now and in the past has contributed to income and wealth inequality in the United States, which is at record levels now, not seen since the Gilded Age.
MATTHEW GARDNER: Sure, yeah. So there’s no question that the role of the corporate income tax as a funding source — both for the United States and for the 45 state governments that rely on it —has dwindled dramatically over the last 50 years. That’s been the product of a couple of things. One is a shift away from taxing profitable corporations, toward taxing individuals. When President Reagan cut the corporate income tax dramatically in 1981 in much the same way that President Trump and Congress just did in 2017, the immediate result of that was an increase in payroll taxes on individuals and increase in other taxes paid by individuals. So there’s been this shift away from corporate taxes towards individual taxes.
At the same time there are other factors that are responsible for this reduction. For one thing, many companies are no longer taking the corporate (tax) form and are now taxed – their profits are passed through individuals. That’s always worth keeping in mind.
It’s not just this wholesale slashing of corporate taxes, but pretty clearly a constant shift in the pattern of taxation from big profitable corporations to the rest of us is a big driver in these results we’re seeing, this wholesale declining corporate taxes. And, there’s no question that this is a factor in the growing economic inequality, wealth inequality, income inequality that has been widely documented over the last 50 — certainly the last 25 years. The reason for that is that economists generally agree that corporate taxes are paid primarily by owners of capital, by the owners of stock. To some extent it’s passed through to wage earners, but that’s a pretty small part of the story.
On balance, it’s a tax on wealth and wealth is disproportionately held by the top 1 percent, the top 5 percent of Americans. When you have a shift in taxation away from profitable corporations toward everyone else, that is unambiguously a shift away from progressive taxes — taxes that fall primarily on the best off — and toward regressive taxes that hit low, and middle income families more heavily.
For more information, visit the Institute on Taxation and Economic Policy at itep.org.