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5 Tax Myths You’ll Hear During Republican Presidential Debate

This blog post also appeared on the Huffington Post.

We tune into presidential debates for the surprises (who knew Rick Perry couldn’t count to three?), but most of what happens is all too predictable. At a GOP debate, you can be sure taxes will be a hot topic. After all, what ailment can’t be cured with a tax cut?

Here are some perennial Tax Myths we can expect to hear in Thursday’s debate — and why you shouldn’t believe any of them.

MYTH #1: The way to create jobs and grow the economy is to cut taxes — a lot.

When Republicans talk about cutting taxes on the middle class you may end up with a few extra bucks in your pocket each paycheck, but the real winners are the rich and big corporations. The standard GOP position on tax cuts is to slash the top tax rate on the rich by more than one third and the corporate tax rate by about 30 percent. Millionaires would get an average tax cut of at least $200,000 a year, according to Citizens for Tax Justice.

The only way they can pay for these gigantic tax cuts is to slash benefits and services for average Americans, cutting into everything from Medicaid and Medicare to child nutrition and education services.

When it comes to taxes, what really matters to working Americans is seeing that the wealthy and corporations pay their fair share. The loophole-ridden tax code encourages corporations to hide profits and ship jobs overseas. This holds down wages and denies us the revenue needed to fix roads and bridges, build schools and conduct life-saving medical research.

As for the economy, rebuilding our infrastructure and providing Food Stamps for hungry kids generates a lot more jobs than does more take home pay for millionaires. If you want to address inequality, create a fair tax system.

MYTH #2: The American corporate tax rate is the highest in the world and lowering it would boost our economy.

The only number that matters when you’re talking about tax rates is what is actually paid. While the U.S. corporate tax rate is 35 percent, the effective tax rate paid by U.S. companies on their worldwide income was a meager 13 percent in 2010, according to the Government Accountability Office. Many corporations — General Electric, Verizon, Priceline.com and 23 other big firms — paid nothing at all in federal income taxes over a recent five-year period.

The problem isn’t that U.S. corporate tax rates are too high. It’s that American corporations aren’t paying what they should. While workers’ wages are stagnant and corporate profits are sky high, the corporate share of federal revenue has plummeted. Real corporate tax reform would stop subsidizing U.S. corporations that ship jobs offshore and close loopholes so that they pay their fair share.

MYTH #3: Corporations are holding more than $2 trillion in profits offshore because our corporate tax rate is too high, so we should drastically cut the tax rate to entice that money home.

The reason there are $2.1 trillion in U.S. corporate profits offshore is to avoid paying U.S. taxes on the money. It’s a giant tax dodge.

Corporations can do this because of a loophole called “deferral.” It allows them to delay indefinitely paying taxes on their offshore profits as long as they do not bring them back home as dividends paid to shareholders. However, companies can still bring the profits back and invest them in Treasury bonds or even the stock of other companies. In fact, much of the profits offshore are actually invested here.

The answer isn’t — as Republican candidates will suggest — drastically lowering the taxes due on that money to encourage corporations to “repatriate” it. We tried such a “tax holiday” before (in 2004). The only beneficiaries were the corporate executives and shareholders who used the money they brought home to beef up stock prices through repurchases, according to the Congressional Research Service.

Many of these profits are “booked” in tax havens, where the tax rate is next to nothing – if not zero! But a lot of it is earned by the labor and innovation of U.S. workers.

We need to make corporations bring those profits home. But they shouldn’t get a sweetheart tax break to do it. They should pay what they owe each year.

Congress should end deferral. Corporations would then play by the same rules as the rest of us. This would raise $600 billion over 10 years, according to Congress’s Joint Tax Committee.

MYTH #4: We need a flat tax to simplify the tax system and make it fairer.

Americans angry about a rigged tax system are drawn to flat taxes. They assume that if everyone pays the same tax rate, special interests won’t be able to bend the tax code to their will.

But flat taxes are not fair taxes. Despite its loopholes, our current income tax system is still progressive: the higher your income the higher your tax rate. (I know income from investments, which are mostly owned by the rich, are taxed at a much lower rate.)

Flat taxes are regressive. Under a flat tax, the hedge fund manager on Wall Street would pay the same tax rate as the teacher educating his kids.
Take former Gov. Rick Perry’s flat tax plan. Someone making from $40,000 to $50,000 would pay about $250 more in taxes. Millionaires would get a $495,000 tax cut, on average, according to the Tax Policy Center.

MYTH #5: The IRS has become a rogue agency and needs to be seriously reformed, if not abolished.

Any staff abuses at the IRS must be addressed (and that process is underway), but hobbling the agency makes no sense. Unlike almost any other government agency, the IRS actually makes money for U.S. taxpayers: every dollar spent on enforcement brings in $10 of revenue. If we’re really interested in bringing down our deficit and investing in our communities, we need to adequately fund the IRS. Cuts to its budget (an 18 percent reduction since 2010) hurt honest taxpayers because there are fewer employees to answer questions and fewer watchdogs going after tax cheats.