Who foots the bill for taxes corporations pay, avoid?

Did you know that tax breaks for corporations exceed the amount of taxes they pay to Uncle Sam?

Corporations will pay about $136 billion in federal taxes this fiscal year. But, according to a study by Citizens for Tax Justice (CTJ), a Washington research group, tax loopholes will save them $171 billion.

To liberals, that fact illustrates the power of corporate lobbyists to win what CTJ calls "corporate welfare." And, to the delight of Wall Street, the stimulus package passed by Congress this winter will enlarge those loopholes further.

The effective corporate tax rate – what companies actually pay as a proportion of their earnings – will drop 2.5 percentage points, reckons Bruce Steinberg, chief economist of Merrill Lynch & Co. (The rate last year was 22.1 percent.)

The new tax breaks will add more than a dollar to the total earnings per share of the Standard & Poor's 500, an index of 500 major American companies. Mr. Steinberg expects S&P 500 earnings to jump 19 percent in 2003 to $56 per share – though not just because of the extra tax breaks. Strong productivity gains also will widen profit margins of companies.

That's good news for stock-market investors.

Going further, some academic economists – and certainly many business lobby groups – say the corporate tax should be completely abolished. They see it as a burden on the investments that advance productivity, and thereby living standards for everyone.

Chances of Congress taking that step, however, are slim.

What is happening instead is that corporate taxes are fading gradually in their importance. In the 1960s, corporate tax revenues came to 4 to 5 percent of gross domestic product, the nation's total output of goods and services. By 1995-97, they had fallen to about 2.5 percent. This year and next, corporate tax revenues will amount to only 1.3 percent of GDP, figures CTJ.

Who ultimately bears the burden for the billions of tax dollars corporations pay each year is difficult to determine. The subject has been debated by economists for decades. The tax bill might be paid by consumers through higher prices. Employees can have their salaries or benefits cut. Or shareholders may take the hit via reduced earnings and dividends.

Perhaps corporate taxes cost all these parties something.

The fading of corporate taxation helps stock prices. That largely benefits the upper-income Americans that own the bulk of corporate shares, and widens an already large income gap between rich and poor. It also means Washington must raise individual income taxes, including those on the less-than-rich.

Despite the boom of the late 1990s, with its low unemployment rates, the gaps between high-income and low- and middle-income families are historically wide, notes a new study by the Center on Budget and Policy Priorities and the Economic Policy Institute, two Washington think tanks. In all but five states, income inequality has increased over the 1980s and 1990s.

Economic growth results from the efforts of all workers, ranging from the laborer to the corporate chief executive, says Elizabeth McNichol, one author of the study. They should thus all share more equally in the benefits of that prosperity.

The current division of income is "not the American way," she says. Prior to the late 1970s, income inequality was not so severe as it is today. Her study blames the growing inequality on globalization, the shrinkage of manufacturing and expansion of low-wage service jobs, immigration, the lower real value of the minimum wage, and the weakening of trade unions.

Government policies, in both Washington and in state capitals, could "push back" against the inequality trend, Ms. McNichol says. But that's not what's happening.

Last year, Congress passed a tax bill that gives the largest proportion of its $1.3 trillion in tax benefits to the well-to-do. Lower- and middle-income Americans have most of their tax benefits already. But, notes a study by the Democratic staff of the Joint Economic Committee, two-thirds of the Bush income-tax cuts implemented after 2002 will go to those making $100,000 or more and 60 percent to those with incomes of $500,000 or more – less than 1 percent of taxpayers.

"The Bush tax plan is a recipe for higher inequality," says Jared Bernstein, another author of the think tank's study of incomes.

As long as Bush remains president, those phased-in tax cuts are likely to go ahead. But growing budget deficits are a cause for concern in the White House.

One way to raise revenues could be closing some dubious corporate tax shelters that have thrived in recent years. Congress and the Internal Revenue Service are looking at these more closely.

Revenue lost from known IRS tax-shelter cases amounts to 2 to 3 percent of total corporate tax revenues, says Joseph Bankman, an expert at Stanford University's law school. Add in those not challenged by the IRS, and the loss could be $7 billion, he guesses.

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