August 3, 2010
Corporate Tax Incentives Not As Costly As Opponents Claim
Tax Foundation Study Compares Corporate Tax Expenditures by Industry; Shows That Incentives in Individual Income Tax Code Are More Generous
Washington, DC, August 2, 2010 -A new Tax Foundation report shows that the tax preferences available to corporations are not as generous as political rhetoric makes them seem, nor do they have a major impact on reducing the effective tax rate or overall amount of income taxes corporations pay.
"The budgetary cost of popular tax preferences available to individuals—such as the mortgage interest deduction, exclusion for employer-paid health insurance and the exclusions for pensions and 401(k)'s—are all larger than the $102 billion in budgetary costs of corporate tax expenditures in 2011," said Tax Foundation President Scott Hodge, who authored Tax Foundation Special Report, No. 184, "Putting Corporate Tax 'Loopholes' In Perspective," available online at http://www.taxfoundation.org/publications/show/26580.html.
The term "tax expenditures" refers to the budgetary cost of tax preferences such as exclusions, exemptions, deductions, credits, preferential rates or deferral of tax liability.
"A closer examination of tax preferences among corporations shows that the largest category includes tax provisions that are generally available to all firms, regardless of industry," Hodge said. "Despite the recent campaign against tax breaks for the oil and gas industry, it receives just $2.8 billion in targeted tax incentives—less than 3 percent of all incentives. By contrast, the renewable energy sector, receives $11.3 billion."
The Office of Management and Budget estimates that generally available tax expenditures will cost $54.8 billion in 2011, compared to $19.6 billion for industry-specific incentives, $12.9 billion for state and local government bond exclusions, $10.2 billion for charity and social policy and $3.8 billion for changes to depreciation rules.
On the individual income tax side, the exclusion for employer-provided health insurance will cost $177 billion in 2011, the exclusion for pensions and 401k's will cost $142 billion in 2011 and the mortgage interest deduction will cost $104 billion. Tax expenditures aimed at aiding state and local governments—such as deductions for property and income taxes and the exclusion of bond income—are projected to cost $96 billion.
U.S. firms paid an effective tax rate of roughly 27 percent in 2007, according to the most recent IRS data available, not too far below the statutory federal corporate income tax rate of 35 percent. By comparison, the top 1 percent of individual taxpayers—who also face a top income tax rate of 35 percent—paid 23 percent of their income taxes in 2008.
"If lawmakers perceive that there is a problem with corporate tax expenditures, then the right way to consider them is within the broader context of corporate tax reform, not in a politically charged, piecemeal fashion," Hodge said. "Next to Japan, U.S. companies face the highest statutory corporate income tax in the world. This uncompetitive tax rate, not corporate tax breaks, is threatening U.S. competitiveness in the global economy and the nation's long-term economic growth."
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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