Tax reform is a hot topic in Congress these days and for good reason. Our current tax system is broken, complicated and clearly gives preference to some industries over others, which is obviously unfair.
A recent study by the respected accounting firm PricewaterhouseCoopers — and widely read on Capitol Hill — showed gigantic disparities among industries. Retailing, wholesaler-distributors and service providers had effective tax rates — the rate of taxes they actually paid — of 36.4 percent or higher. By contrast, utilities and other industries posted effective tax rates as low as 9.4 percent.
Economists and accountants measure effective tax rates in many ways. The PricewaterhouseCoopers study looked at the weighted average of the “domestic financial statement effective rate” from 2007 to 2011. But every such measure shows clearly that the U.S. tax code picks favorites, often dramatically so. And that is simply wrong.
S&P Capital IQ looked at Standard & Poor’s top 500 companies and the federal, state, local and foreign taxes they paid from 2007 to 2012. The result showed utilities at an average of 12 percent, information technology companies at 21 percent, telecommunications and drug companies at 26 percent, chemical and minerals companies at 31 percent, financial-services companies at 33 percent, retailers at 34 percent and energy companies at 37 percent.
The disparity between these industries demonstrates a central problem with the current tax code. Happily, the chairmen of the congressional tax-writing committees recognize this and intend to make major repairs with draft legislation as early as this fall.
Nonetheless, each industry has a litany of reasons it should still be favored. But as a matter of public policy, those reasons are hard to justify.
Retailing, for instance, is America’s second-largest private sector employer, surpassed only by health care. Retailers employed more than 17 million Americans in 2010, a 12.1 percent share of the private nonfarm economy.
Why, then, is the government taxing so vital an industry at one of the highest tax rates in the U.S.? With an effective tax rate in the mid-30s, the retail industry has the fourth-highest domestic effective corporate income tax rate of the 18 major U.S. industrial sectors examined by PricewaterhouseCoopers.
In fact, some industries are paying taxes at a rate that is 17 points lower than the average for all industries, except retail. This discrepancy means that some major industries pay much more in taxes than others and, in that way, are deprived of funds that could otherwise be used to grow their businesses and stimulate the economy overall.
Our argument is not that every industry should be taxed exactly at the same effective rate as every other industry. Rather, such glaring disparities in the amount of taxes businesses pay demonstrate what is wrong with the broken tax system. A guiding principle for revenue-neutral, comprehensive tax reform should be that no industry should get preferential treatment.
Chairman Max Baucus, D-Mont., of the Senate Finance Committee and Chairman Dave Camp, R-Mich., of the House Ways and Means Committee understand this, and we would be wise to embrace their efforts to pass comprehensive tax reform that broadens the base, substantially lowers the rates, simplifies the tax code and treats all industries more equitably. Judging this type of reform through effective tax rates, the amount that businesses actually pay, will allow U.S. companies to compete globally, invest and expand their businesses, and most importantly, create new jobs.
Vice President Joe Biden waits to conduct a mock swearing-in ceremony with Sen. Brian Schatz, D-Hawaii, in the Capitol's Old Senate Chamber, December 2, 2014. Schatz was sworn in to serve the remainder of his term since he was appointed to the seat after Sen. Daniel Inouye, D-Hawaii, passed away.