The news that Facebook made more than $1 billion in profit and yet will nonetheless get a $429 million tax refund comes at about as teachable a political moment as possible. With the president using his State of the Union address to demand what he called "comprehensive tax reform," headlines about Mark Zuckerberg's behemoth force us to ponder what that phrase really refers to - and whether it refers to something far more sinister than meets the eye.
That's a possibility worth pondering, after all, since only a year ago the president defined "comprehensive tax reform" as specifically ending the alleged situation whereby "companies that choose to stay in America get hit with one of the highest tax rates in the world." When juxtaposed next to the deeper meaning of the Facebook situation, such platitudes look less like earnest objectives than misleading lobbyist-sculpted talking points designed to further reduce corporate taxes in what is already one of the lowest-tax (and, thus, most deficit-plagued) countries in the industrialized world.
The details of the specific Facebook tax break reveal that bigger story. As the nonpartisan Citizens for Tax Justice shows, the company used a gaping tax loophole that lets companies pay their executives in stock options, and then, when the options are exercised, the firms "take a tax deduction for the difference between what the employees pay for the stock and what it’s worth." The New York Times summed up the net effect: "Companies can claim a tax deduction in future years that is much bigger than the value of the stock options when they were granted to executives" thereby "depriv(ing) the federal government of tens of billions of dollars in revenue over the next decade."
Thanks to this and other such tax subsidies, deductions, write-offs and loopholes, the United States has become something of a paradox - we simultaneously have a comparative high official corporate tax rate and a very low effective corporate tax rate.
How low? The best way to answer that question is to look at corporate tax receipts as a percentage of the whole economy - which is exactly what the Bush administration did back in 2007.
That year, citing data from the Organization for Economic Cooperation and Development (OECD), the Republican-run Treasury Department issued a report showing (on page 42) that the United States' corporate tax receipts as as percentage of GDP was the third lowest in the industrialized world. By 2009, OECD data showed we slipped to second lowest in the industrialized world, with only debt-riddled Iceland below us.
This difference between the official 35 percent tax rate and the far-lower effective tax rate, of course, explains why we periodically see news reports about most major corporations paying little or no corporate taxes at all - and in many cases, getting a tax refund financed by the taxes the rest of us pay. In all, as the Wall Street Journal reported last year, American corporations are now paying an effective rate of just 12.1 percent. That's not "one of the highest tax rates in the world," as the president alleges - it is one of the lowest in the developed world, and, according to the Journal, one the lowest rate America has had in at least four decades.
Considering these facts, and further considering the obvious need to raise public revenue at a time of burgeoning deficits, it would seem that the very first step in any tax reform proposal should be to leave America's existing corporate tax rate alone (or even raise it), and simply close the kind of loopholes that let profitable firms like Facebook pay nothing and get tax refunds. That way, our effective corporate tax rate might both match the average of our global economic competitors and generate more public revenue to help reduce the deficit. No doubt, the self-evident pragmatism of such a policy prescription explains why polls show the vast majority of Americans support it.
Instead, though, the politics are reversed as both President Obama and most Republicans in Congress continue to insist that before any discussion of closing tax loopholes commences, a tax reform proposal must first and foremost include a major reduction of the official corporate tax rate. Put another way, while closing revenue-draining loopholes remains negotiable, lowering the overall tax rate has become a non-negotiable point of bipartisan agreement.
This, of course, is the power of money in politics. There is a well-organized, well-funded army of campaign-contribution-wielding lobbyists whose corporate clients have a vested interest in both preserving existing loopholes and reducing the official tax rate from its already low level. By contrast, there is no similarly organized or strongly financed opposition to such a crusade. That's because those who have a vested interest in such an opposition - aka millions or regular citizens who rely on public revenues to fund social services, infrastructure, etc. - are precisely the groups that are not well organized and that possess disproportionately little political power.
In other words, this is a fight between Corporate America and Middle America - and Washington today answers to the former, not the latter when left to its own devices.
But that's where the Facebook headlines come in. When a story comes along about a universally recognized - and recognizably profitable - brand, it can penetrate public consciousness in a profound way. That it is coming around right at the time the Obama administration is redoubling its effort to lower the already low corporate tax rate makes it particularly politically inconvenient for Washington.
Suddenly, headlines like this that a year ago may have semeed politically advantageous could quickly become politically toxic as Americans wonder why corporations should pay even less than they are already paying. Suddenly, in short, questions about all the wrongheaded and insidious assumptions baked into the corporate tax debate might be raised - and that could change the ultimate outcome.