Corporate Tax Loopholes

The marginal tax rate for corporations is 35 percent. This is one of the highest tax rates among wealthy countries, which makes it a great talking point for anti-tax conservatives. However, corporations typically pay less than a quarter of their profits in taxes, making the U.S. a relatively low tax country.

Having a high tax rate and then filling the code with loopholes is a way to support the loophole industry, it is not good economic policy. It makes much more sense to lower the rate and eliminate the loopholes, so that the marginal tax rate is also the rate that businesses actually pay. Ideally this should be done in a way that raises some additional revenue, since we will need more money once the economy recovers.

There is a long list of ill-conceived tax breaks that have been put into the tax code over the years, but the best place to start is with the drug industry’s credit for research. As a result of this and other tax breaks the pharmaceutical industry pays just 5.6 percent of its profits in taxes. This puts it just above the biotech industry, which pays 4.5 percent of its profits in taxes.

It is bad enough that the drug industry manages to earns its tens of billions in annual profits largely tax free. However, much of this research spending does little to advance public health. Much of this money goes to develop me-too drugs of little medical value. Some of the research is effectively marketing, as the drug companies try to promote the use of their drugs under the auspices of doing post-approval trials.

The result of this system is that we often end up paying hundreds or even thousands of dollars per prescription for drugs that would sell for just a few dollars in a competitive market without patent protection. The government already spends more than $30 billion a year on bio-medical research through the National Institutes of Health. It would make much more sense to directly finance the research by the industry, eliminate the tax breaks and let all drugs be sold as generics at Wal-Mart for $4 per prescription.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article was one of several in response to the question “Where should Obama start if he is serious about making all companies pay their fair share?” on the New York Times’ Room for Debate blog.


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Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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