Sometimes a simple answer can turn out to be the most complex. There are times when a seemingly easy solution ends up complicating matters. That truly is the case right now in the conversation about raising the corporate tax rate as a way of paying for much of the stimulus spending and upcoming infrastructure plans. The initial proposal from the administration is to move the rate from 21 to 28%, a 1/3 increase. In broader discussions involving Congressional leaders and the administration, there are compromise numbers kicked around that might raise it from 21% to 25%. In any case, there is a target on the corporate tax rate right now. More traditional methods of paying for infrastructure investments like the gas tax have been taken off the table for various reasons. Given the urgency of these policies, Congress is looking for ‘fast money’ and less at reforms that would broaden the tax base. If only it were that easy.
Right now, many corporations taxed at the 21% rate are primarily small to midsized domestic companies without tax shelters or offshore holdings. In our world, that means a lot of our HFA members, home furnishing retailers that have struggled through the pandemic and have been working hard to survive. Not to mention the additional state tax liabilities that impact HFA members. It’s important to point out that these are businesses already shouldering the higher cost of goods because of supply chain problems and tariffs. In many cases, they have been unable to push all of those added costs onto the customer. All along, we have dealt with the closures of the pandemic and the difficulties they are having hiring good talent. It’s a tough time to do business right now. The added taxes seem like piling on. Frankly, I’m concerned that this could be the last straw for some of our struggling members.
What frustrates me is the word from the IRS. Commissioner Charles Rettig says the U.S. government is losing $1 trillion in unpaid taxes every year. Let me emphasize; he said every year. Rettig claims this tax gap comprises underreported income, underpayment or nonpayment of taxes owed, and exaggeration of claimed tax breaks such as deductions and credits. A trillion dollars is money that could be making a difference right now to pay for stimulus and infrastructure legislation and offset some of our rampant deficit spending. How come we’re not collecting money that’s owed, especially when it’s a trillion dollars? Over the last number of years, some of the most significant cuts to federal departments have been to the IRS. One of our HFA members said that would be like gutting his accounts receivable department. How can you run a business without supporting the department tasked with collecting revenue? Does that make sense?
In many ways, uncollected taxes are an excellent argument for simplifying our tax codes, which is constantly bantered about by politicians but rarely undertaken with any seriousness. Brookings Economist William Gale notes that “the notion that taxes should be simpler is one of the very few propositions in tax policy that generates universal agreement. However, because tax codes are so complex, simplification must be done carefully not to make the tax codes more complex.”
Then let’s look at long-term solutions and, in Gale’s words, carefully find ways to simplify. Anything short of that, any “simple” approach and its higher tax rates, will disproportionately hurt businesses like furniture retailers. In my view, that is “simply” unacceptable.