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Monday, March 21, 2011

Cuts to education, breaks to corporations

From the Phillidelphia Tribune

by Christopher Moraff

Americans angered by companies’ failure to pay full shares

In just under a month, those Americans who haven’t already done so will undertake one of those two tasks (death being the other) that popular culture tells us are unavoidable: We’ll pay our taxes.

For many, it’s an endeavor filled with silent scorn, made only slightly easier by the knowledge that everyone else is paying too.

If only.

For years, analysis has shown that some of America’s largest companies exploit the Tax Code to avoid paying their fair share of taxes. The most recent government data, a GAO report from 2008, found that roughly a quarter of the largest U.S. companies reported zero tax liability in 2005.

A more recent analysis, conducted for The New York Times by research firm Capital IQ, determined that of the 500 companies on the Standard & Poor’s stock index, 115 paid a tax rate of less than 20 percent for the past five years, well below the 35 percent proscribed by tax law.

But that’s nothing compared to companies like Boeing, which actually received a tax rebate totaling $75 million over the years 2008-2010 (on profits of $9.7 billion), or General Electric, which, according to Robert McIntyre — director of the nonprofit group Citizens for Tax Justice — had an effective tax rate of negative 15.8 percent from 2006 through 2010. (Forbes has noted that GE has “displayed an uncanny ability to lose lots of money in the U.S. and make lots of money overseas, where tax rates are lower.”)

Suffice to say, such figures have made some people mad as hell.

Indeed, last fall, after the British government announced cuts to the public sector, a small, spontaneous grassroots group blossomed in London into a national protest movement against corporations that don’t pay their taxes.

Initially the group, known as UK Uncut, went after Vodafone — which reportedly owes the UK billions of pounds in unpaid taxes — staging sit-ins at retail locations.

In February the movement jumped the Atlantic and, as US Uncut, has been targeting a handful of companies including Bank of America — which received a $1.9 billion tax benefit in 2009 — FedEx and Verizon.

The new climate of protest is no surprise to tax reform advocates like Seth Hanlon, director of fiscal reform for the progressive Center for American Progress.

“I think people are starting to focus more on these issues because conservatives in Congress are proposing to decimate some of the most important federal programs — Pell Grants, low-income housing programs, nutrition assistance, just to name a few — on the basis that we can’t afford them. But they have left corporate tax breaks entirely off the table,” said Hanlon.

Carl Gibson, a spokesperson for US Uncut, says that the group’s message has been “magnetic,” drawing consensus from activists on the right and the left. In fact, thanks largely to its use of social media, the group now has chapters in a number of U.S. cities and is expanding in Europe.

“It doesn’t seem right that those with the most pay the least and those with the least pay the most [in taxes],” he said. “We just want companies to pay their fair share.”

US Uncut’s most recent (and first) nationwide action, on Feb. 26, drew roughly 2,000 people; in Philadelphia, about 30 people gathered outside of Comcast’s headquarters to protest the state tax break the company received for building its massive headquarters in Center City. US Uncut is gearing up for another national event, on March 26, with actions planned in 28 cities.

Gaming the System

Corporations use an amalgam of technically legal ways to lower or eliminate their federal tax bill, but most fall into two main categories: legitimate writeoffs used legitimately, like tax benefits for research and development; and legitimate writeoffs used illegitimately, such as using creative accounting to funnel profits into foreign subsidiaries in low tax countries.

Rebecca Wilkins, a senior counsel of federal tax policy at Citizens for Tax Justice, says that corporate America has pushed tax avoidance schemes to the “brink of illegality.”

“They’ve gotten incredibly creative at it and have many highly paid consultants helping them do it,” Wilkins said.

Among the more egregious techniques companies use to game the system is “transfer pricing,” which involves the fees subsidiaries of a corporation charge each other for intercompany exchanges. Firms abuse transfer pricing by shifting costly assets from places like the United States to low or no-tax jurisdictions, like Luxembourg or the Bahamas. Intangible assets like patents and trademarks are especially attractive for income-shifting schemes since their value is arbitrary and therefore more open to distortion.

For example, a pharmaceutical company might transfer a drug patent to an overseas subsidiary in a low-tax jurisdiction (Ireland is a current favorite). The company then charges its U.S. divisions, which account for the bulk of distribution, a hefty licensing fee for use of the patent. Thus, income is shifted to the patent-holding subsidiary, while the U.S. subsidiary records a loss.

Of the 100 largest U.S. corporations, 83 have subsidiaries in low-tax countries, according to the President.

Loophole Heaven

While there is certainly a fair amount of funny business that goes on in corporate accounting departments, much of the problem with tax avoidance can be traced to America’s notoriously complex corporate tax code, which presents innumerable opportunities for completely above-board accounting shenanigans.

“Our tax code is a monumental collection of rules and regulations, riddled with loopholes and preferences …,” House Minority Whip Steny Hoyer said last week. “Many of those loopholes –or tax expenditures, as they’re also called– are popular with special interests. But they exact a high price from the rest of us.”

The U.S. Tax Code has grown from 400 pages in 1913, to over 70,000 pages today; over the years hundreds of exemptions have been added, some at the behest of industry lobbyists, others by lawmakers looking for a quick and easy way to court favor among their constituencies without the need to actually appropriate anything.

“[Expenditures] cost the U.S. Treasury the same as if it enacted some spending program to do the same thing,” explained Wilkins. “[But] they don’t get the same scrutiny that spending measures do; they don’t have to be appropriated every Congress, it’s easy to get them enacted and we think that’s a pretty bad way to use the Tax Code.”

There are hundreds of so-called expenditures for individuals and businesses under U.S. tax law. For corporations, one of the most expensive is a rule that defers taxes on profits made by U.S. businesses overseas until it is brought back to the U.S., a caveat that not only denies the U.S. Treasury revenue that it is rightfully due, but creates an incentive for companies to invest their money outside the country. Industry estimates put the total earnings affected by the rule at $1 trillion.

The number of industry-specific exemptions — like those targeted at the oil industry (which gets $40 billion in annual subsidies) or at farmers — grew by 50 percent between 2004 and 2008, according to the conservative Tax Foundation.

“Business tax subsidies are simply an economically useless waste of resources,” said McIntyre. “That’s because companies don’t ask for subsidies that would force them to change their behavior. Why would they? Instead, they ask for subsidies to reward them for doing what they would do anyway.”

The Treasury Department’s official but incomplete estimate of the cost of tax subsidies for corporations, business owners and business investors in 2011 is $365 billion.

All of which is why, despite having among the highest corporate tax rates on paper, actual U.S. corporate income taxes now rank near the bottom among those of all developed countries. That doesn’t make sense to many people, and a movement is afoot in Washington to change the system.

Last May, a bill that would have chipped away at some of these tax loopholes passed in the House, only to collapse less than a month later in the Senate under the weight of a GOP filibuster. Known as The American Jobs and Closing Tax Loopholes Act of 2010, it would have eliminated $14 billion of foreign tax credit loopholes, its drafters said. Some provisions of the bill (minus the tax reforms) eventually found life as the Unemployment Compensation Extension Act of 2010, which was signed into law in July 2010.

Recently the Obama administration has signaled that it is ready to take a leadership role on tax reform.

“It makes no sense, and it has to change,” President Obama said in his State of the Union address. “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.”

A proposal from the President’s Fiscal Commission to lower the corporate tax rate to 23 percent and eliminate loopholes has gotten early support from both Democrats and Republicans.

The plan mirrors President Ronald Reagan’s successful reform efforts of the 1980s, which increased corporate tax revenues by 34 percent despite also lowering the rate by eliminating some industry specific tax breaks, leasing tax shelters and offshore corporate profit shifting.

However, the changes brought about by Regan’s plan were short lived, and many of the same expenditures were reinserted during the Clinton and Bush years.

Contacted for comment, Liz Ferry, a spokesperson for the Greater Philadelphia Chamber of Commerce, said the group hasn’t taken a position on the administration’s proposal; but Nicole Giles, who heads the African American Chamber of Commerce — which represents 466 members that do business in the Philadelphia area – thinks it’s time for reform.

“If you simplify the tax code and, in doing so, close some of the loopholes, then we are actually generating more income from tax revenues than has been the case with a higher tax rate, so that’s something we would support,” Giles said. “It’s really about generating more revenues by not allowing people to escape their tax liability … that’s something that affects the entire business community as well as the community at-large due to the lack of funding support for key services.”

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