Editor's Note: For perspective on the debate over tax cuts and deficit fixes, a classic case study of how the tax code became a slush fund for corporate America.
IN A SEASON OF campaign rallies and million-dollar ad buys, President Bush opted for one decidedly understated ceremony. On October 22, just 11 days before the election, he boarded Air Force One to sign $137 billion in new tax breaks for corporate America, one of the largest industry giveaways in two decades. This was his fifth major tax cut, but this time there was no glad-handing, no photo op—just a one-sentence press release. The president had nothing to brag about. His signature expanded exactly the sort of tax avoidance he had railed against at a campaign rally that morning: "The rich hire lawyers and accountants for a reason when it comes to taxes," Bush had told a roaring audience at a hockey arena in Wilkes-Barre, Pennsylvania. "That's to slip the bill, and stick you with it."
It was an apt description of the vaingloriously named American Jobs Creation Act of 2004. Though the law began as an effort to end a $5 billion-a-year corporate tax subsidy that had been declared illegal by the World Trade Organization, it had grown into a hydra-headed beast. The law's principal author, Ways and Means Committee chairman Bill Thomas (R-Calif.), jokingly referred to it as "Miss Piggy" on the House floor. Arizona Senator John McCain decried "the worst example of the influence of special interests that I have ever seen." The president's own Treasury secretary, John Snow, bemoaned the myriad "tax provisions that benefit few taxpayers." Top White House economists protested one new loophole that would cut $3 billion, primarily from the taxes of pharmaceutical and high-tech companies, without yielding "any substantial economic benefits."
Almost every industry in America received special favors. The tax cuts included half a billion for shipbuilders Northrop Grumman and General Dynamics, $100 million for NASCAR racetrack owners, and $9 million for arrow manufacturers. Importers of Chinese ceiling fans—like Home Depot—got a break, as did energy companies angling to build a natural gas pipeline in Alaska. About $231 million went to reduce the taxes of shopping-mall developers in the states of key House and Senate members. Four Texas companies received special dispensation to shelter their profits in the Caribbean. The law also cut taxes on railroads, coffee roasters, timber firms, and Hollywood studios. General Electric received tax benefits worth more than $1 billion over the next decade.
"From the beginning to the end, this was designed by lobbyists," says C. Eugene Steuerle, codirector of the Urban-Brookings Tax Policy Center, who spearheaded corporate tax reform as a member of the Reagan Treasury in 1986. "The only question was whether this was the worst tax bill in our lifetime or the worst tax bill in U.S. history."
WHEN REPUBLICAN leaders took control of the House of Representatives a decade ago, they vowed to end such legislative fiascoes. Unfettered markets rather than government intervention, they proclaimed, would determine Wall Street's winners and losers. In the Contract With America, Republicans promised a return to "fiscal responsibility" and to "end the cycle of scandal and disgrace" by which Democrats pandered to special interests. But far from living up to this rhetoric, the GOP leadership has presided over an explosion of new tax loopholes and pork-barrel spending. "It's worse now than it was under the Democrats," says Stephen Moore, president of the archconservative Club for Growth. "The Democrats invented the game, and Republicans perfected it."
Conservatives in Congress, especially, have seized upon tax policy as a way of doling out favors to supporters while maintaining a facade of "smaller government"; tax breaks boost corporate bottom lines as effectively as pork-barrel expenditures, without requiring the Treasury to cut a check. Since 2000 alone, Wall Street's tax bills have dropped by a third. As a percentage of the gross domestic product, corporate taxes are now at their lowest level in 20 years—and their second-lowest level since the Great Depression. Nearly 95 percent of corporations pay less than 5 percent of their income in taxes. This despite a tax rate that officially stands at 35 percent.
"The corporate income tax bears no relation to income—it's a bunch of special-interest provisions," says Gary Hufbauer, a fellow at the Institute for International Economics and a former tax policy analyst in the Nixon, Ford, and Carter administrations. Corporate America, he says, has gotten the message: Taxation is little more than punishment for not promoting your interests on Capitol Hill. "If you do not lobby," says Hufbauer, "you are going to get taxed."