A quick item to share from the Boston Globe today about the lengths companies will go to avoid taxes. This one from Raytheon is really over the top:

The Waltham defense contractor [Raytheon] unsuccessfully tried to persuade a Massachusetts state tax board that because most of the company's work is done for the federal government, it should be exempt from paying state sales taxes on much of what it buys here - items as diverse as toilet paper, a juke box, and promotional gifts such as golf umbrellas, pins, and key chains.

The Globe article has an interesting narrative about the crazy state of tax policy in America when it explains how items purchased for resale are taxed - it details why Burger King has to pay tax on paper napkins but McDonald's doesn't have to pay tax on the toys included in happy meals. It is worth reading and will crystalize for you how insane it is that Raytheon thought they would get $700,000 - plus interest! - from the state of Massachusetts for snow plowing and office supplies.

This isn't the first time Raytheon has failed to win this exemption from MA. Seems like the Raytheon folks should stick to building missles and leave the tricky tax avoidance schemes to the experts.

(h/t Government Inc.)

Staying with our current theme of taxes and corporate America, let me direct your attention toExecutive Excess 2008: How Average Taxpayers Subsidize Runaway Pay -- a report from Institute for Policy Studies and United for a Fair Economy.

On Wednesday, I wrote that even though it's wrong to simply state that two thirds of corporations do not pay corporate income taxes, heavy criticism can be leveled at the tax code because it's rigged such that a lot of profits escape taxation. This IPS/UFE report takes aim at tax laws that encourage stratospheric executive compensation while costing some $20 billion annually.

The report notes that 30 years ago, the average American CEO was paid some 30 to 40 times that of the average American worker. In 2007, however, CEOs were compensated at a rate 344 times greater than that of the average worker. While the explosion in the pay gap has many causes, federal tax law has played role. And, aside from abetting obscene executive pay, the $20 billion in forgone revenue could be put to other uses.

All subsidies involve trade-offs. Each time we allow executives and their employers to avoid paying taxes they would otherwise owe, we reduce government's capacity to deliver needed services that taxpayers and their families would otherwise receive.

Tax subsidies for excessive executive pay represent a particularly indefensible waste of government resources. At the moment, no serious observer of the American scene is arguing that top business executives, as a group, earn too little in compensation. So why then should government, in any manner, be encouraging corporations and investment firms to pay their executives even more?

Craig's post this morning on the issue of corporate taxes made me dig through my files to pull up another Government Accountability Office (GAO) report I remember seeing last month about corporate tax compliance. In July the GAO released a report entitled "Businesses Owe Billions in Federal Payroll Taxes," which found, among other things, that businesses owed billions in federal payroll taxes. From the report:

IRS records show that, as of September 30, 2007, over 1.6 million businesses owed over $58 billion in unpaid federal payroll taxes, including interest and penalties. Of that amount, 70 percent of all unpaid payroll taxes are owed by businesses with more than a year (4 tax quarters) of unpaid federal payroll taxes, and over a quarter of unpaid payroll taxes were owed by businesses that accumulated tax debt for more than 3 years (12 tax quarters). Some of these businesses took advantage of the existing tax enforcement and administration system to avoid fulfilling or paying federal tax obligations-thus abusing the federal tax system.

Yikes. That sounds pretty bad. But it gets worse:

GAO selected 50 businesses with payroll tax debt as case studies and found extensive evidence of abuse and potential criminal activity in relation to the federal tax system. The business owners or officers in our case studies diverted payroll tax funds for their own benefit or to help fund business operations. (emphasis added)

While I think Chamber of Commerce spokesman Martin Regalia would be hard pressed to come to the defense of these companies, OMB Watch has larger fish to fry. While the tax evasion and cheating carried out by the 1.6 million companies as detailed in this report is bad criminal unpatriotic vile, what might be worse is the poor tax enforcement system at the IRS that allowed them to not only get away with it once, but get away with it year after year after year.

Although IRS has powerful tools at its disposal to prevent the further accumulation of unpaid payroll taxes and to collect the taxes that are owed, IRS's current approach does not provide for their full, effective use. IRS's overall approach to collection focuses primarily on gaining voluntary compliance-even for egregious payroll tax offenders-a practice that can result in minimal or no actual collections for these offenders. Additionally, IRS has not always promptly filed liens against businesses to protect the government's interests and has not always taken timely action to hold responsible parties personally liable for unpaid payroll taxes.

Hmmm...the IRS doesn't do a good job of collecting taxes. Not really news - we've been saying that for months. But I wonder if the Chamber will be promoting the findings of this report as fervorently as they did the one on corporate tax liabilities. I'm guessing they won't.

The U.S. Chamber of Commerce would prefer that you not know that the U.S. corporate tax code leaks revenue like a sieve. Chamber spokesman Martin Regalia complains about the media's and Sens. Carl Levin's (D-MI) and Byron Dorgan's (D-ND) treatment of a recent GAO report on corporate tax avoidance.

Once again, the GAO data has been twisted and misinterpreted by those seeking to attack corporate America....Many news reports claim that the GAO study revealed that almost two-thirds of companies in the US usually pay no corporate income taxes. What the GAO report actually said was that for the period between 1998 and 2005, corporations — not necessarily the same corporations — had no tax liability for one of the eight years in question.

That's totally a fair point. In fact, on the BudgetBlog last week, Adam rapped Levin for using the term "tax trickery" to explain why so many corporations had no tax liability in at least one year of the report's window. But Regalia does the smart (from his perspective) thing and avoids addressing Dorgan's point that

The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls.

Right. The statutory federal corporate income tax rate is 35 percent (almost 40 percent when state taxes are included), but 35 percent is really more of a theoretical construct. The tax code has so many loopholes that corporations rarely actually pay that rate on their profits. In fact, according to Tax Analysts, corporations, on average, paid a tax rate of 25.5 percent from 2002 to 2006.

Additionally, the GAO report's timeframe -- 1998 to 2005 -- covers not only the "Dot Com" boom, but also the most recent recovery. By the end of 2005, firms on the S&P 500 had reported 14 straight quarters of double-digit growth. But the GAO report tells that, on average, every year within this time period some two-thirds of all corporations operating in the U.S. paid no corporate taxes. If Regalia's insistence that the GAO report does not indicate mass tax fraud -- a reasonable claim -- is true, then we should all gawk in wonder at a tax code that taxes corporations mostly in theory only.

Brad DeLong has a great post on the tradeoffs we face in bringing the long-term budget into balance.

Note that [raising revenue] is not optional. As the late Milton Friedman liked to put it: to spend is to tax. If the government buys things, it must get the money to buy them from somewhere. It can get the money from three places. It can tax. It can borrow--but then the borrowing has to be repaid with interest, and the more is borrowed the higher the interest and the worse the value the taxpayers ultimately get for their money when they are taxed to repay the borrowing. Or it can print the money and so inflate the currency--but that too is a tax, and an especially unfair, painful, and destructive one, as lots and lots of people victimized by inflation find their wealth doesn't buy what it used to and what they expected.

As economists estimate, the long-term budget faces in a very significant fiscal gap that must be closed, and, as Brad plainly states, whoever tells you that increasing revenue is not necessary is selling you something.

(h/t Matthew Yglesias)

Image by Flickr user DennisSylvesterHurd used under a Creative Commons license

The Department of Labor released its weekly unemployment insurance claims data this morning. Initial and continuing claims moved slightly downward, from 445,000 to 432,000 and from 3,379,000 to 3,362,000, respectively. The four-week moving average of initial claims, however, ticked up from 438,500 to 445,750.

Over on Capital Gains and Games (a favorite blog of the Budget Brigade), budget guru Stan Collender and Pete Davis muse, in a couple of posts, on the presidential candidates' budget plans. They emphasize the point that, as much as they may want to implement deficit-increasing tax and/or expenditure plans, the market may have other plans.

First, Collender reminds us that in the post-Reagan world, economic policy options were limited.

The bond market "vigilantes" -- the same people who forced the Clinton administration to propose and push for deficit reduction -- are starting to say that the moon, stars, and planets may line up again in 2009 to force the next president to do the same thing.

In a follow-up post, Davis explains how large, persistent deficits impact the economy. This may give the next president pause (Davis hopes) and put the kibosh on his plans.

High real interest rates choked off recovery from the 1980 recession until early 1983, and real growth turned down again in 1986, but stopped short of a recession. The first chart [shown] also shows the "neutral real rate" required to keep the economy at full production. With the credit crisis, it has moved negative, where it remains today. It will take us at least another year or two to come out of our economic "slowdown," and rising interest rates could easily choke that recovery off.

I posted on Tuesday this week about a new report from the Government Accountability Office that shows a significant number of corporations are playing fast and loose with their U.S. tax liabilities. Giving further evidence that the BudgetBlog is where it is at, I got a call from a reporter (Carolyn Said) at the San Francisco Chronicle within ten minutes of posting my blog. She was working on a story about the GAO report. I was quoted in her well-written story (see Most U.S. firms paid no taxes over 7-year span) as were many other fine analysts and experts.

One quote in particular was from William Ahern, spokesman for The Tax Foundation, a Washington, DC nonpartisan tax research group with a conservative perspective on taxes. Mr. Ahern said that there was nothing wrong with corporations employing armies of accountants and lawyers to exploit every possible tax loophole. Specifically, he said:

In that respect, they are just like individuals. Don't we all fill out our tax returns as aggressively as we know how and take every deduction and credit we're entitled to, even if they're unprincipled, even if they're in the tax code only because Congress thinks we will appreciate them for subsidizing us?

Now my disagreements with some of the perspectives of the fine folks at The Tax Foundation aside, I couldn't agree with Mr. Ahern more when he says corporations can behave just as illegally opportunistically as individuals. In fact, sometimes they work together. Case in point is an AP story that also appeared in the San Fran Chronicle a few weeks ago (mea culpa from the Budget Brigade for missing this story). Seems the U.S. Senate Permanent Subcommittee on Investigations issued a report in July identifying two European banks of assisting wealthy Americans evade U.S. taxes. The two banks, UBS of Switzerland and LGT of Liechtenstein, are part of a larger infrastructure that "aggressively" evades U.S. tax laws, either by exploiting loopholes or just by outright cheating - to the tune of $100 billion annually. Yup, that's $100,000,000,000 each year!

The gut-wrenching horror of this entire situation is that we don't need to figure out whether individuals or corporations are to blame. They both are! These banks are exploiting excessively secretive international finance laws, "aggressively" recruiting wealthy Americans to go to pretty much any lengths to intentionally break U.S. tax laws, and our fellow citizens are going along with it. Patriotism just isn't what it used to be. (btw, you can read the subcommittee report, see documents from a subcommittee hearing on the issue, and even watch archived footage (real player format) of the hearing.)

In case that hasn't made you lose your appetite completely, this will. Ellen Miller at the Sunlight Foundation points us to a Washington Post story from last week that details the large increase in political contributions from UBS's PAC and top executives, and other key figures of the Senate investigation, during the 2008 election cycle. Ellen Miller:

The Post article states that officials with the banks have given more than $2 million this year, $98,000 in June alone, to congressional and presidential campaigns. USB spends close to $1 million a year on lobbying and is traditionally a big campaign giver. But so far this cycle the Swiss bank's contributions have surpassed what it gave in the whole 2006 election cycle. The Post quotes a bank spokesperson as saying the bank's giving is in no way related to the Senate investigation. The article didn't say, however, whether it was said with a straight face.

No, thanks. No dessert for me. I'm full.

The OMB Watch Fiscal Policy Program is looking for an intern for the fall of 2008. Yup, that's right. This is your chance to get in on the ground floor at one of the most dynamic nonprofit watchdog groups in Washington, DC. We're looking for energetic undergraduate or graduate students who have excellent writing, critical thinking, and communications skills, and who are dedicated to public policy and government accountability (see current intern Josh at right for example).

The internship is unpaid, but you'll have the chance to gain first hand experiences and take on significant responsibilities related to a number of different aspects of policy analysis in DC. Plus, you'll get a chance to write for the BudgetBlog - what could be better?

Interested? Learn more about the position and how to apply.

What We Can Say and What We Can't

The Government Accountability Office (GAO) released a new report today showing that an average of two-thirds of companies operating in the United States paid no federal corporate income tax from 1998 - 2005. That's right, I said none. Zip. Zero. Nada.

The report was requested by Sens. Byron Dorgan (D-ND) and Carl Levin (D-MI) as a follow up to a similar report GAO did in 2004 in which they found similar levels of tax liability reported on corporate tax returns from 1996 through 2000. In fact, in 2004, GAO found that domestically controlled companies and foreign controlled companies "reported tax liabilities of less than 5 percent of their total income, an estimated 94 percent and 89 percent, respectively, in 2000." Wow. Upwards of 90 percent of companies paid at most 5 percent in federal income taxes in 2000, despite the corporate income tax rate being 35 percent.

While you digest that little tidbit (or maybe choke on it), let me tell you about transfer pricing, which is at the heart of these GAO reports and a long time thorn in the side of Sens. Dorgan and Levin, who I guess think corporations should pay taxes.

Read more about transfer prices

Posted by Adam Hughes, 04:43:39 PM

Monday, August 11, 2008

Thursday, August 07, 2008

Wednesday, August 06, 2008

Tuesday, August 05, 2008