Pro-Business Lobby Misinformation, Part 1—Corporate Taxes

Tuesday, August 12, 2008 at 08:03 PM

Ever notice that any attemptâ€"any attempt at allâ€"to restrain corporate actions in any wayâ€"any way at allâ€"immediately produces a spate of articles and studies showing that the attempt is outrageous (or destructively expensive or costing jobs or putting the US at a disadvantage or contrary to the universal desires of God and nature)? Take corporate taxes (I wish the government would take some).

Everybody knows the country’s corporate tax burden is too high, right? And that its corporate tax rate needs to be cut just to give us a fighting chance against those foreign companies that pay practically no taxes at all, right? You hear this stuff all day on Fox News, you hear it almost every day from the mainstream media, and you can build a paper castle out of all the right-leaning think tank reports on the subject. In fact, John McCain's web site discussion of his stimulus plan says:
Economic Stimulus Plan

Cut The Corporate Tax Rate From 35 To 25 Percent.

A lower corporate tax rate is essential to U.S. competitiveness. America was once a low-tax business environment, but as our trade partners lowered their rates, America failed to keep pace, leaving us with the second-highest rate among the world’s advanced economies.[1]

Cutting the corporate tax will expand the U.S. economy, creating jobs and opportunities for prosperity. A recent analysis of tax policy options estimated that a cut less than half this size could increase long-term growth by 0.5 percent, or $100 billion in a single year.[2]

Lower corporate taxes leads to higher wages. Recent studies have shown that corporate taxes are in large part passed on to labor through lower wages. One study noted that a one percent hike in the corporate tax results in a 0.8 percent decrease in manufacturing wages.[3] Accordingly, cutting corporate taxes can increase wages for American workers.

But…..

Neal Cavuto & Glenn Beck notwithstanding, and despite Cato’s attempt to scare the world with chants that U.S. Has Fourth Highest Corporate Tax Rate. the GAO just issued a report on corporate taxes showing that 72% of all foreign controlled corporations operating in the US, and some 57% of US controlled corporations operating here paid no federal income taxes for at least one year between 1998 and 2005. And around half of all corporations operating here paid no taxes for two or more of those years.

The report unfortunately names no corporations and made no attempt to determine whether the reasons that the corporations paid no taxes were legitimate. But this isn’t the first study to find these results. Back in 2004, the GAO found that:

showed that 61 percent of US corporations paid no federal income taxes from 1996 through 2000, a period of rapid economic growth and rising corporate profits.
Say, maybe the right question isn’t “what is the official corporate tax rate,” but “what is the effective rate actually paid?” Needless to say, I’m sure that McCain (or more likely his economic advisers), Cavuto, Beck, and even good old Cato are aware that many corporations often pay no taxes at all. Do they just forget to tell people that when they’re beating the “lower the tax rate” drums? Have these solid citizens with their abiding concern for the health of artifcial entities at the expense of living and breathing ones actually know what the effective corporate tax rate is? Does anyone?

But don’t get your hopes up. The 2004 report didn’t really get the public all that angry. And I suspect the same reaction to the 2008 report, as well as the same explanation from the business folks about why “this is nothing to get upset about.” As reported back in 2004, the explanation from the business folks, like said Gary Hufbauer, senior fellow at the Institute for International Economics, was that "When you get a report like this people think, gee, they're getting away with murder. But most of the murder they're getting away with was deliberately designed by legislatures in response to competitive concerns. This is the result."

It is, indeed, the result. And a pretty good reason to reexamine the policies that produced that result. Which should be done honestly, openly, and in good faith. Meaning that McCain, Cavuto, Beck, Cato, et. al. should have no part in the reexamination.

In closing, I point out that the focus of the GAO study was whether there was a difference between foreign-controlled companies here and US-controlled companies here, and the answer was largely yes, there is. Foreign corps tended to be even more likely than US corps to pay no taxes (though there were a lot in both categories). Another real good question raised by the study is whether corporations are abusing the hell out of the tax systems by manipulating the price that one subsidiary charges another subsidiary along the production and distribution chain. It’s awfully simple for a subsidiary in a low tax country to sell a $1 item for $50 to a subsidiary in a high tax country. The sub in the low tax nation shows a huge profit but pays little tax, while the sub in the high tax country shows little profit and pays little tax.

I’d bet my life that this abuse of transactions between affiliated companies (a practice that has long been used to avoid profit constraints imposed on regulated utilities) is a major reason that drug companies tend to show more profits for their foreign operations than they show for their US operations.

Ain’t business grand? Ani't business ethics the cutest little oxymoron you ever saw?

Comments

Thanks. I appreciate that you and the GAO both highlighted the fact that large percentages of corporations had NO tax liability during some recent period even though THAT WAS NOT THE FOCUS OF THE STUDY!!

Interesting lesson in penetrating the news barriers to important facts.

Using your interpretation of the information, if we lower the tax rate, most corporations will not be affected and it shouldn't matter about the tax rate.

Don't blame the corporations, blame Congress. They are the ones that pass all the tax breaks for various reasons - don't plant, develop alternative energy, keep a steel mill in West Virginia, appease voters in a particular state, etc.

You did not indicate if the study was for all companies or only public companies. None of my clients with C-corporations pay tax, as we zap it with year-end bonuses and use the corporate structure for benefit purposes. I would suspect that a vast majority of all corporations are small businesses that would pay no or very little tax.

If you look at the billions that ExxonMobil paid, you can guess where a few extra cents at the pump was allocated. Higher taxes, higher prices.

LVwatcher:

Using your interpretation of the information, if we lower the tax rate, most corporations will not be affected and it shouldn't matter about the tax rate

What an odd comment. The tax rate obviously continues to matter significantly to those corporations which do pay taxes, and hopefully that percentage will go up as a result of this study and the related congressional investigations. It sounds like you agree with Cato's Chris Edwards to whom I just gave my informal huckster of the month award for claiming that this study means that we should lower tax rates to reduce the incentive to cheat and stash money offshore. You can read the Chris Edwards piece for my response to that theory (the links in this piece appear to be screwed up; you can find the Edwards piece via the preceding link if that works, or via the front page of WTW; it's dated Monday).

Don't blame the corporations, blame Congress. They are the ones that pass all the tax breaks for various reasons

I blame congress for passing laws creating all these easily manipulated deductions at the behest of the business community which so heavily lobbies for them. It's not an either/or question when it comes to responsibility here.

If you look at the billions that ExxonMobil paid, you can guess where a few extra cents at the pump was allocated. Higher taxes, higher prices.

Interesting assumption there. You really think that if the US said "tax holiday this year," then Exxon would lower their prices accordingly?

The only time that a corporation (or any other entity) really takes taxes into account is in determining how high a profit margin they need in order to pay their tax obligation and take care of the shareholders snd investment needs. Don't you think it's safe to assume that Exxon's calculations for 2008 were set based on expectations of far lower prices than they commanded? That's precisely why there is talk (meaningless in all likelohood) of a windfall profits tax.

As for which corporations were included in the analysis, the study appears to have looked at a sample of all corporate tax returns (including S corps and C corps). The following is the description of the methodology, which keyed on the various versions of Form 1120:

...we analyzed data from the Internal Revenue Service's (IRS) Statistics of Income (SOI) samples of corporate tax returns for tax years 1998 through 2005. These SOI samples were based on returns as filed, and did not reflect IRS audit results or any net operating loss carrybacks from future years. The data that we report are estimates based on the SOI sample. Sampling errors are reported in appendix II. Caution should be used when comparing estimates because not all differences between estimates are statistically significant. Various types of corporations report their taxes on different forms and may differ in their tax liabilities. Unlike our previous reports, here we report separately for each form type. The estimates in the body of the report are for corporations filing Forms 1120 or 1120-A. (In app. II we provide separate estimates for corporations filing Forms 1120-L, 1120-PC, 1120-REIT, 1120-RIC, and 1120S.

If the link works properly, you can find the GAO report here.

The manipulation of small corporation profit by means of benefit purchases is probably one area of corporate taxation that needs to be looked at. However, the GAO study separately looked at large corporations and found that a significant chunk of those also payed no taxes.

If the nation wants a tax policy that allows most corporations to avoid paying taxes, so be it. But that decision needs to be made in public, in the daylight, with accurate information. In contrast, most people were shocked at the results of the GAO study (as they were by the 2004 study finding the same thing, but which quickly faded from the public memory.