Someone's tax break is others' tax bite

Inversions. Corporate tax reform. Unpatriotic companies.

It seems as if the insane tax code has finally driven everyone over the cliff. But before you break out the champagne and start celebrating the rationalization of a totally dysfunctional corporate tax structure, remember what happened when the budget deficit skyrocketed and everyone clamored for budget reform:

There was a lot of talk but no action.

First, what in the world is a Tax Inversion? It is a perfectly legal way to lower taxes by purchasing a foreign company and moving the headquarters to that country. Since those nations have lower corporate taxes than the United States, the tax burden is reduced.

And that is happening more and more. A recent Congressional Research Service study indicated that 47 firms have inverted over the last decade. But when consumer-related companies, such as Burger King, started doing it, the average person took notice.

While tax inversions might seem like good business for some, they have real implications for the rest of us. Just remember Naroff's First Law of Taxes: "There is no such thing as a free tax break."

If one company gets a special deal that reduces its taxes, everyone else must pay for that break.

The shifting of the tax burden is not an issue of Democrats vs. Republicans, liberals vs. conservatives, or business interests vs. social interests. It is simple math. No matter how much money a government spends, the revenues have to be raised.

If one company pays less, someone or everyone else has to pay a little more to make up the shortfall.

Unfortunately, any special tax break, not just a tax inversion, creates separate classes of taxpayers: Those who benefit from the tax deals and those who pay higher taxes as a result. For example, an inversion only works for international companies large enough to buy a foreign company and able to pay the massive merger bill. Small or midsized businesses have little chance of doing inversions.

It would seem, then, that with only the special few getting the biggest tax breaks, most executives would be clamoring to change the tax laws. Well, think again. Maybe the biggest obstacle to corporate tax reform is the corporate sector itself.

Business leaders are always complaining that the U.S. corporate tax rate is too high. True, the posted marginal effective rate of 35.3 percent is the highest in the industrialized world. But that rate is not paid by a lot of companies and the average tax rate is much lower: Estimates range from about 16 percent for large companies to about 26 percent overall, but it is clearly not 35.3 percent.

Rate differentials created by loopholes are what drive the corporate opposition to tax reform. Executives support all tax breaks because they hope they too will get a special deal that will lower their taxes. Real tax reform would require getting rid of everyone's tax break, which means firms who now have low tax rates would pay more. Good luck with that.

There is also opposition from business groups, such as Chambers of Commerce. I have never heard an executive director of a chamber come out and complain about a tax deal. But, as I've pointed out, that deal raises the taxes of all the other chamber members.

And since tax breaks tend to go mostly to larger companies, small and midsized businesses bear the greatest burden. Logically, Chambers of Commerce should oppose all tax breaks that don't benefit every company.

There is also political opposition. How does a politician curry favor with the business community? By opposing higher corporate tax rates and supporting all those special tax gimmicks that allow firms to pay lower taxes. Tax reform that eliminates loopholes and reduces the ability to plug special deals into legislation diminishes the need for business-friendly politicians.

But it is not just the business side of the aisle that opposes tax reform. There are many in Congress who want to tax businesses more. They want to "shift the burden from individuals to corporations." That, of course, is nonsensical. Higher corporate taxes get shifted - in different ways by different firms - to customers, employees, executives, and/or shareholders, all of whom are people.

The current U.S. tax code needs to be abolished completely. In my talks to business groups, I get lots of laughter when I ask: Does anyone think that those responsible for creating the tax code should be allowed to walk this earth freely?

But until that amusement is channeled into a willingness to give up the special tax loopholes businesses have - or hope to secure - politicians will have little reason to change the laws.

To paraphrase Mark Twain (actually, Charles Dudley Warner), "Everybody talks about tax reform, but nobody is going to do anything about it."