Tim Geithner: We Need To Make Sure Corporations 'Pay Their Fair Share'

02/14/2012 04:36 pm ET
  • Bonnie Kavoussi Master's student in economics, the University of Michigan

If you're feeling upset while filing your taxes this year, knowing that super-rich Americans like Mitt Romney could be paying a lower tax rate, Treasury Secretary Timothy Geithner says he understands.

Despite taking heat for mistakenly not paying payroll taxes between 2001 and 2004, Tim Geithner is arguing that the current tax code is unfair and privileges some people and corporations over others.

"Our current tax code is inefficient and filled with loopholes," Geithner said at a Senate Financial Committee hearing on Tuesday. "We need a tax system that is simpler and more efficient, one where businesses and individuals play by the rules and pay their fair share."

The issue of fairness in the tax code has become a flashpoint in recent months. Billionaire investor Warren Buffett called on lawmakers to "get serious about shared sacrifice" in an August op-ed in The New York Times, where he said he pays taxes at a lower rate than his secretary: a fact that President Obama highlighted in his State of the Union address last month. A quarter of U.S. millionaires pay a smaller share of their income in taxes than 10 million middle-class families, according to a January report by the Congressional Research Service cited by The Washington Post.

The issue has also come up on the campaign trail. Republican presidential candidate Mitt Romney released his tax returns last month after mounting pressure from his opponents. The returns showed that despite his hundreds of millions of dollars in combined income he shares with his wife, he paid taxes at a 13.9 percent rate in 2010, lower than that of many middle-class Americans.

That's in part because the U.S. taxes capital gains -- which make up much of Romney's income -- at just 15 percent, while wages earned through labor are taxed up to 35 percent.

In addition to spotlighting the gap in tax rates between middle-class and rich Americans, Geithner also highlighted corporate tax loopholes that distort incentives and allow some corporations to even "avoid paying income taxes almost entirely."

"There are too many tax provisions that favor some industries and investments and benefit only those who receive them, rather than society as a whole," he said. "This creates problems beyond forgone revenue: it forces some businesses to carry a larger share of the tax burden than they would under a more equitable system, and it also hurts overall economic growth by distorting incentives for investment and job creation."

Corporations altogether are paying a lower share of their profits in taxes than they have in four decades. Facebook, for example, is likely to use its entry into the stock market to avoid paying any income taxes at all in 2011. Google, using a different tactic, has saved about $1 billion per year by shifting its profits overseas.

And more than half of Fortune 500 companies are incorporated in Delaware, largely to pay low state corporate taxes.

Some tax-evading companies have been on a hiring spree of late. Fifty-seven percent of private equity executives added staff in 2011, and 62 percent plan to hire again in 2012, according to a BDO USA report cited by 24/7 Wall St. Google hired more than 8,000 people in 2011 alone.