America's Corporate Tax System Is Really, Really Stupid

In his State of the Union address, President Obama recommended simplifying the corporate tax code and ultimately lowering rates for the first time in 25 years.

A worthy cause, reasons David Leonhardt at The New York Times, but good luck with that, Mr. President!

Leonhardt argues that America's corporate tax system is doubly ineffective:

The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.

While the federal corporate tax rate is nominally 35 percent, Leonhardt learns that 115 of S&P 500 companies have paid a total corporate tax rate--which includes federal, state, local, and foreign taxes--of less than 20 percent over the last five years. One of the more extreme examples is cruise ship company Carnival, whose taxes have amounted to 1.1 percent of its profits. These companies and their lobbyists aren't going to let their loopholes go quietly into the night, Leonhardt predicts.

What are the loopholes, exactly? Some companies spend a lot of money on new equipment or buildings while others, like G.E., have turned avoiding taxes into an art form. Carnival, for its part, is incorporated in Panama even though its executives are in Miami.

The issue, Leonhardt says, is that all this tax avoidance injects inefficiency into the economy and slows economic growth: "Airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success."

So next time you're on a Carnival cruise ship, carve some time out to ponder the mess that is our country's corporate tax system. That's sure to ruin your vacation.