A Democratic Senator wants to raise $200 billion over ten years by closing corporate tax loopholes, according to Bloomberg News. Sen. Carl Levin (D-MI) wants to ditch a slew of goodies for corporations, as well as a loophole that allows wealthy money managers to pay far less in taxes than middle-class families:

Senator Carl Levin’s push to close tax loopholes will target corporate deductions for stock options and rates on investment income known as carried interest, seeking to raise at least $200 billion by one estimate.

In a memo to Democratic Senate committee leaders on Friday, the Michigan Democrat described proposals to end what he called excessive corporate tax deductions, scrap the blended tax rate for derivatives such as commodity futures and strengthen enforcement of the tax code, Bloomberg BNA reported. [...]

The plan is estimated to raise at least $200 billion over 10 years, according to a person with knowledge of the details. Levin told reporters he was sharing ideas with fellow senators and had asked the congressional Joint Tax Committee to estimate budget costs and savings for the provisions.

Republicans (and plenty of Democrats) like to talk about revenue-neutral corporate tax reform, in which every dollar raised if offset by a reduction in the corporate tax rate. Levin has consistently opposed this approach, and for good reason.

Corporate profits are currently at record highs while corporate taxes have plummeted. Corporations paid just a 12.1 percent effective tax rate in 2011. The corporate income tax used to make up about one-third of federal revenue, but today it makes up less than 9 percent. The corporate income tax used to follow along with corporate profits, but the two have become decoupled, with negative impacts for the federal budget:

As former White House economist Jared Bernstein noted, “locking in these historically low revenue levels, either as a share of GDP, total receipts, or profits, would be yet another self-inflected wound.”

There’s no shortage of corporate tax giveaways at both the federal and state levels. Lawmakers of all stripes love to use the tax code to subsidize companies, either directly or indirectly.

But in some instances, federal tax breaks for corporations undermine state budgets. As the Center for Budget and Policy Priorities detailed today, one particular tax break will cost states $600 million next year:

The federal government created this tax break, known as the “domestic production deduction,” in 2004. Since most states base their own tax codes on the federal tax code, the tax break was carried over into many states without specific legislative scrutiny or a vote. Now it is costing not only the federal government but also 25 states a large amount of money. By 2014, it will cost these states over $600 million per year.

The deduction — enacted as Section 199 of the federal Internal Revenue Code — allows companies to claim a tax deduction based on profits from “qualified production activities,” a sweeping category that goes well beyond manufacturing to include such diverse activities as food production, filmmaking, and utilities — a substantial share of states’ corporate income tax base.

These deductions are largely worthless, and many states have tossed them overboard. But 25 states still leave it intact:

As CBPP noted, “Firms can claim the domestic production deduction for profits from all qualifying domestic activities — meaning activities that occur anywhere within the United States. As a result, a multi-state firm can claim the deduction in a conforming state for production activities in any state, not just the state where the firm is filing.” They also benefit large firms at the expense of small.

State efforts to encourage corporate growth and job creation through the tax code usually encourage a race to the bottom, as corporations play states off each other in order to secure the most preferential treatment, and then feel no hesitation about up and leaving later. Of course, paying corporations to create jobs is only one of the bone-headed ways states try to generate economic activity.

American corporations avoid millions of dollars in taxes each year by reporting that large shares of their income are earned in five popular tax havens, even though small segments of their workforce and investment take place in those countries, according to data from the Congressional Research Service.

The report analyzed five countries — Switzerland, Ireland, the Netherlands, Bermuda, and Luxembourg — that serve as popular tax havens, compared with five countries — Canada, Germany, the United Kingdom, Australia and Mexico — where American companies typically do large shares of their business. What it found, as Citizens for Tax Justice highlighted, is that even though large shares of their workforces and investment concentrated in the “traditional economies,” large shares of their profits were reported in the five tax havens:

In 2008, American multinational companies reported earning 43 percent of their $940 billion in overseas profits in the five little tax-haven countries, even though only four percent of their foreign workforce and seven percent of their foreign investments were in these countries.

In contrast, the five “traditional economies,” where American companies had 40 percent of their foreign workers and 34 percent of their foreign investments, accounted for only 14 percent of American multinationals’ reported overseas’ profits.

American companies have become experts at routing profits overseas, with companies like Apple and Microsoft avoiding billions of dollars in taxes each year. The problem has gotten particularly bad in the last decade, as this chart from the report shows:

At the same time, many business leaders are advocating for a particular corporate tax reform, known as the territorial tax system, that would make it even easier to route profits overseas and avoid American taxes.

House Ways and Means Committee Chairman Dave Camp (R-MI) is preparing to unveil the GOP’s corporate tax reform package, Reuters reports. Like in his previous proposals, Camp “wants to slash the top corporate tax rate to 25 percent from 35 percent and simplify the code.” President Obama has also suggested an interest in lowering the corporate tax rate and cleaning out loopholes, so there is some hope that corporate tax reform could be grounds for bipartisan agreement.

However, Camp and his Republican colleagues have some unfortunate ideas about where corporate tax reform should go. Here are the key facts to know before the debate starts:

– Corporate profits are at record highs, while corporate taxes are at record lows. While the U.S. has a 35 percent corporate tax rate on paper, few corporations actually pay that, due to a proliferation of loopholes, deductions, and the widespread use of tax havens. In 2011, the last year for which data is available, the effective corporate tax rate fell to 12.1 percent, a forty-year low. The corporate tax used to track resonably well with corporate profits, but the two have become decoupled in recent years, with profits shooting up while corporate taxes as a share of the economy plummeted.

– Many of the biggest corporations pay no corporate income tax at all. As Citizens for Tax Justice has found, many of the biggest corporations have effective tax rates near zero. 26 major corporations paid no corporate income tax between 2008 and 2011, while making a collective $205 billion in profits.

– The GOP’s favorite corporate tax idea helps outsource jobs. Republicans love to promote a “territorial” corporate tax system, under which offshore profits made by U.S. companies are never taxed. (Currently, those profits are taxed when they are brought back to the U.S.) The Congressional Budget Office recently reported that such a plan results in “increasing incentives to shift business operations and reported income to countries with lower tax rates.”

– Corporate tax reform should raise revenue. Corporate taxes used to make up about one-third of federal revenue; now it makes up less than 9 percent. The U.S. used to raise about 5 percent of GDP in corporate tax revenue; now it raises below 2 percent. As former White House economist Jared Bernstein noted, “locking in these historically low revenue levels, either as a share of GDP, total receipts, or profits, would be yet another self-inflected wound.”

Under current U.S. tax law, corporations are allowed to defer paying taxes on their overseas profits, resulting in lost revenue for the federal government of up to $10 billion per year. President Obama has proposed doing away with this policy, somewhat, by restricting the use of tax credits until corporations bring those overseas profits back to the U.S. and pay taxes on them.

However, a slew of corporations have, for years, been pushing for the U.S. to adopt what’s known as a “territorial” system for corporate taxation instead. Under such a system, U.S. corporations would never have to pay taxes on profits earned overseas. House Republicans have embraced the idea, as did Mitt Romney during his unsuccessful presidential campaign.

But the Congressional Budget Office is out with a new warning about adopting such a system:

Alternatively, the United States could move toward a territorial system—for example, by exempting some income earned abroad from U.S. taxation or by taxing domestic income only but using a formula that considered the location of a company’s activities to determine the sources of its income. Such policies could result in a less efficient allocation of resources among countries by increasing incentives to shift business operations and reported income to countries with lower tax rates.

While it, too, has its problems, “eliminating deferral entirely would boost U.S. tax revenues by more than $100 billion over a 10-year period.”

As the Center for American Progress’ Seth Hanlon noted, “Deferral provides tax incentives for overseas investments. In fact, it encourages U.S. companies to make job-creating investments off shore even if similar investments in the United States (absent tax considerations) would be more profitable.” Economist Martin Sullivan wrote that “U.S. tax law provides a large tax advantage for building and moving factories to low-tax countries.” And adopting the GOP’s desired shift to a territorial system would make the problem worse.

By passing legislation to avert at least part of the so-called “fiscal cliff,” the combination of tax increases and spending cuts that was set to take effect at the beginning of the year, Congress avoided income tax increases on households that make less than $450,000 a year. The deal still raises taxes on 77 percent of American households, though, because Congress did not include an extension of a temporary payroll tax cut meant to stimulate the economy.

What Congress did manage to extend, however, was a set of corporate tax breaks that benefit NASCAR, the professional stock car racing circuit, as well as breaks for filmmakers and Puerto Rican rum producers:

– SEC. 312. EXTENSION OF 7-YEAR RECOVERY PERIOD FOR MOTORSPORTS ENTERTAINMENT COMPLEXES.

– SEC. 317. EXTENSION OF SPECIAL EXPENSING RULES FOR CERTAIN FILM AND TELEVISION PRODUCTIONS.

– SEC. 329. EXTENSION OF TEMPORARY INCREASE IN LIMIT ON COVER OVER OF RUM EXCISE TAXES TO PUERTO RICO AND THE VIRGIN ISLANDS.

The legislation also extended two provisions — known as “active financing” and “look-thru” — that make it easier for corporations to shelter profits overseas. Overall, the package of corporate tax breaks extended in the legislation cost $40 billion a year, and corporate tax breaks in total cost the government more than $100 billion a year.

Meanwhile, there was bipartisan opposition to extending the payroll tax cut, since Republicans oppose it outright and many Democrats feared it would undermine Social Security, which is financed by payroll tax revenues. Proposals to replace the payroll tax cut with another provision, like the Making Work Pay credit, were never seriously considered as part of the final package. The expiration of the payroll tax cut (or failure to find a replacement) was the most economically damaging piece of the tax side of the fiscal cliff, according to the Congressional Budget Office.

Evidence that the global corporate tax rate has dropped significantly in the past decade counters a conservative myth that corporations suffer from too-high taxes. As several countries — most prominently the UK — renew scrutiny over tax dodging, a Deutsche Bank report illustrates how the global effective corporate tax rate has dropped significantly in the past decade:

Corporations avoid paying taxes on billions in earnings by registering profits to low-tax havens. Recently, Amazon, and Starbucks, among others, have faced fire in the UK for “immoral” tax dodging. Starbucks pays an overseas tax rate of 13 percent, “one of the lowest in the consumers goods sector,” while Apple and Amazon have paid single-digit global tax rates and just 3.2 percent and 5.3 percent on overseas profit.

In the U.S., corporate profits are at an all-time high, while revenue from the corporate income tax has plummeted. (HT: Business Insider)

There have been lots of ideas kicked around for inclusion in a deal that would avert the so-called “fiscal cliff,” the tax increases and spending cuts scheduled for year’s end. But Democratic Sen. Carl Levin (MI) wants one more item placed onto the table — corporate tax revenue:

Sen. Carl Levin (D-Mich.) pushed Friday for including tens of billions of dollars in additional revenues from corporations into any year-end tax-and-spending deal. [...]

On the Friday call, Levin said that he wanted the elimination of corporate tax breaks to be an immediate revenue-raiser in a deal, or that a commitment to end those incentives be part of a broader, long-term deal.

The Michigan Democrat also said that wringing some $200 billion to $300 billion out of corporations would be sufficient in a broader deal.

Corporate tax revenue is currently below its historic average, even though corporate profits are at an all-time high. The corporate income tax used to track reasonably well with the rise and fall of corporate profits, but has become decoupled in the last few decades due to the proliferation of credits, deductions, and loopholes, and the growing use of offshore tax havens, as this chart shows:

Last year, the effective tax rate paid by American corporations fell to 12.1 percent, a forty-year low.