Making the tax code fairer and flatter will accomplish the Trump administration's goal of draining the swamp by weakening the power that corporate lobbyists have in Washington. The corporate side of the tax ledger, which has created a policy status quo in which some industries are taxed at a 35 percent rate while others pay no taxes, is a horrid mishmash of social engineering and corporate welfare. Lowering the rate and broadening the base will stop the government from picking winners and losers and fire a warning shot across the bow of the corporations whose tax rate is determined more by their lobbying teams than by smart policy.
The corporate tax rate in the United States stands at 35 percent — the highest in the developed world. But it's rare that any corporation actually pays a 35 percent rate. Through a mixture of tax credits, subsidies, loopholes, deductions and more, the effective average corporate tax rate stands at 22 percent, according to the Treasury Department. Big corporations such as General Motors and Apple have had years when they've paid close to a 0 percent tax rate.
How much companies pay in taxes varies heavily by industry. The construction and retail industries, for example, pay the highest average rates, at 27 percent, while the utilities industry pays the lowest average rate at 10 percent. This is no accident. Congress passed a law during the 2008 financial crisis designed to stimulate capital investment by allowing companies to take immediate write-offs, and the utilities industry is a capital-intensive industry. The utilities industry also heavily benefits from subsidies for green energy — so the utilities that have invested in solar, wind, and other renewables have gotten massive tax benefits from the government.
Corporate lobbyists and tax-preparation firms wield a lot of political clout in order to keep it this way. There's a massive benefit to big corporations using their lobbying power to secure special tax breaks when a 35 percent rate looms over their head, and tax preparation firms get to bill longer hours with a more complicated code that's filled with credits and deductions. A lower rate means that corporations won't have the incentive to work as hard to secure the distortionary tax breaks they currently enjoy.
That's before even discussing the merits of the corporate tax. Political analysts across the ideological spectrum have argued that the corporate tax is paid not out of executives' pockets, but from the compensation of lower-tier workers. The corporate tax plays well because many Americans distrust corporations, but the money isn't coming from the C-suite, it's coming from friends and family who make up the bulk of the workforce.
Former President Barack Obama agreed with the strategy of lowering the rate while broadening the base. In the waning days of the Obama administration, the White House unveiled a corporate tax proposal that would have lowered the corporate rate to 25 percent while targeting certain credits and deductions. There was bipartisan support for the proposal, but unfortunately not enough political will to make such a major change with a lame-duck administration in office.
President Trump is right that the swamp culture of corporate lobbying in Washington is corrosive. Major corporations left and right keep big lobbying firms on their payroll in order to preserve a tax rate magnitudes lower than the statutory 35 percent rate. The proposed 20 percent rate is a good start, but 15 percent or lower would be even better. The strategy has had support across the ideological spectrum for decades.
The time for corporate tax reform is now, and it's important for those in Congress to begin to drain the swamp by weakening the power of the corporate lobbying industry.
Kevin Glass (@KevinWGlass) is a contributor to the Washington Examiner's Beltway Confidential blog. Previously he was director of outreach and policy at The Franklin Center and managing editor at Townhall. His views here are his own.
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