How to earn $3.5 trillion and pay zero taxes

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http://www.csmonitor.com/2004/0419/p16s03-cogn.html

 

How to earn $3.5 trillion and pay zero taxes

By David R. Francis

 

The April 2 release of a General Accounting Office

report on corporate taxes could hardly have been

better timed to get press attention. Just as millions

of Americans were filling out their federal 2003 tax

forms to beat the April 15 deadline, the GAO study

indicated that most corporations owed no taxes from

1996 to 2000, a boom period for corporate profits.

 

Those untaxed corporations earned $3.5 trillion of

revenues.

 

 

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Any individual who paid taxes provides more money to

run the government than these untaxed firms, says

Barry Piatt, spokesman for Sen. Byron Dorgan (D) of

North Dakota, who, with Sen. Carl Levin (D) of

Michigan requested the study months ago. Next time

Congress considers taxation, Senator Dorgan will be

hammering at the legal " massive tax avoidance " by

companies, promises Mr. Piatt.

 

For years, companies and their representatives, such

as the National Association of Manufacturers, have

complained that businesses are overtaxed. The latest

studies of corporate taxation suggest that, in

general, this is not true. " The usual arguments may be

baloney, " says Piatt.

 

The GAO study found that 71 percent of

foreign-controlled corporations operating in the

United States paid no taxes in those five years; nor

did 61 percent of US-controlled companies.

 

The basic corporate tax rate stands officially at 35

percent. In reality, it's far below that for most

companies. And the importance of corporate tax

revenues for Uncle Sam has shrunk. That's shown by the

numbers.

 

Corporate taxes have fallen from 5 percent of gross

domestic product, the nation's output of goods and

services, in 1946 to 1.4 percent now.

 

As a percentage of all federal tax revenues, corporate

tax payments have declined from 23 percent in 1960 to

13 percent in 1980 and 8 percent today.

 

Using data from the financial statements of publicly

traded companies, the average effective tax rate was

12 percent in 2002, down from 15 percent in 1999, and

18 percent in 1995, according to a study by John

Graham, a finance professor at Duke University's Fuqua

School of Business.

 

And Washington is not doing as much as it has in the

past to see that companies pay their tax bills. In

2003, the Internal Revenue Service conducted

face-to-face audits of only 29 percent of the largest

firms - those with assets of more than $250 million.

That compares with 34.7 percent in 1999, notes a

report by Transactional Records Access Clearinghouse,

a government watchdog group. The IRS says it's

stepping up tax shelter investigations, and adding 250

examiners to its corporate division this year.

 

In 2003, the effective corporate tax rate probably

rose as losses carried over from the last recession

ran out and profits soared, Mr. Graham suspects. Yet,

he adds, " It is surprising that corporations get away

with such a little amount of taxes on average. "

 

Other factors reducing the corporate tax burden in

recent years include more tax shelters, new tax

breaks, and the transfer of profits by multinational

companies to low-tax foreign nations, figures Martin

Sullivan, an economist with Tax Notes, a prominent tax

publication. Companies have also written off the cost

of stock options from their tax liability, yet largely

ignore their cost in their profit and loss statements.

Proposed changes in accounting rules may stop this

practice.

 

The issue of corporate taxes was also thrust into the

presidential campaign by Democratic Sen. John Kerry's

criticisms of President Bush for failing to crack down

on corporate tax dodgers. As for Senator Kerry's

proposal to trim corporate income taxes by 5 percent,

Richard Du Boff, a professor emeritus of economics at

Bryn Mawr College, outside Philadelphia, calls it a

" bad idea. " Kerry has mentioned offsetting any revenue

loss by " eliminating tax loopholes that push jobs

overseas. "

 

Mr. Du Boff remains unimpressed: " In every way, shape,

and form, " both Demo- crats and Republicans have been

" doing their best to lower the corporate tax burden, "

he says.

 

Curiously, economists on both the right and left agree

on the need to close corporate tax loopholes.

 

" A good idea, " says Paul Weinstein, an economist with

the Progressive Policy Institute in Washington.

 

Similarly, Chris Edwards, an economist at the

libertarian CATO Institute, would like to see the

" incredibly complicated " corporate tax system

simplified by eliminating some tax breaks and then

reducing the nominal 35 percent rate. " That would take

away the incentive for companies to hide money, " he

says.

 

But members of the congressional tax committees have

milked the tax code for years to obtain campaign

money, he says. The corporate research and development

tax credit, for instance, is only renewed for a year

or two at a time. That encourages firms that benefit

from the credit to continue to make party donations.

 

Who bears the brunt of corporate taxes has always been

something of a mystery to economists. Do the taxes

paid by firms get shifted to consumers in the form of

higher prices, to employees in the form of lower

wages, or to shareholders by lower dividends and

profits? Or to all of them?

 

" We really don't know, " says Sullivan.