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.)

I came in this morning to find my inbox (well, it was actually my Google RSS Reader, but saying inbox sounds better) deluged with more stories about contractor malfesence. A quick rundown for our BudgetBlog readers:

The Wall Street Journal reports that MVM Inc., one of the largests security contractors used by the U.S. intelligence community, has lost a huge CIA contract - worth up to $1 billion over five years. Apparently they were not providing enough armed security guards, which is strange because that was, you know, what they were contracted to do.

Robert O'Harrow Jr. writing at Government Inc. shares some fascinating facts about the use of contractors in the U.S. intelligence community, including the fact we are paying over $3 billion more each year on average for private contractors to carry out intelligence work than if we just hired more government workers. Shocker! (O'Harrow also highlighted a new Government Accountability Office report on August 15 that detailed the 400 percent (yes, I said 400 percent) markup on a contract to provide the next generation of radios for the Defense Department.)

And the darling of the contracting community KBR Inc., was back in the news today in the Washington Post, again not for a good reason. A Washington law firm has filled suit in a federal court in California alleging that KBR and one of its Jordanian subcontractors were trafficing Nepali workers. From the Post article:

Agnieszka Fryszman, a partner at Cohen, Milstein, Hausfeld & Toll, said 13 Nepali men, between the ages of 18 and 27, were recruited in Nepal to work as kitchen staff in hotels and restaurants in Amman, Jordan. But once the men arrived in Jordan, their passports were seized and they were told they were being sent to a military facility in Iraq, Fryszman said.

As the men were driven in cars to Iraq, they were stopped by insurgents. Twelve were kidnapped and later executed, Fryszman said. The thirteenth man survived and worked in a warehouse in Iraq for 15 months before returning to Nepal.

My favorite part of that article is right at the end when a KBR spokeswoman says, "The company in no way condones or tolerates unethical or illegal behavior." Sure. And I've got a bridge to sell you.

Update:
The folks over at TPMMuckraker dove into the specifics of the lawsuit brought against KBR today and have posted more details.

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.

If it weren't for its direct impact on national security, we could all enjoy a hardy guffaw at the $500 million mess that is supposed to tie the nation's intelligence data together. The anti-terror intelligence database, known as Terrorist Identities Datamart Environment (TIDE), is the subject of recent House Science and Technology Committee's Investigations and Oversight Subcommittee report. The report found that "Railhead," the $500 million project that was supposed to tie together the intelligence data of the nation's 16 separate intelligence agencies. Instead:

The Railhead program may actually degrade the ability to provide intelligence data for use in the consolidated terrorist watch list at the FBI's Terrorist Screening Center. It may cripple NCTC's [National Counterterroism Center] ability to share critical intelligence among U.S. government agencies. It will also potentially jeopardize the ability to provide vital search functions by counterterrorism analysts.

[...]

In fact, the new Railhead systems that NCTC hopes will replace the current TIDE~database by early next year may not provide critical search, access, sharing and other vital functions the current system does currently provide.

The issues that have put the system at risk are myriad, but the report describes two that totally dumfound me.

1) The new system's technology is incompatible with what the rest of federal government uses (indeed, with what most of the world's businesses use). Rather than use a technology known as a "database," the contractor hired to build the new system wants to use something not dissimilar from masses of Microsoft Word documents.

2) The system can't perform basic data searches using combinations of text. An analyst can, for instance, search for data containing the word "anthrax," but she wouldn't be able to search for data containing the words "anthrax" or "plague." In other words, this $500 million clunker is already technologically behind most free internet search engines, like Google.

The subcommittee are also incredulous, and wonder, as they directly ask in the report, if the contractor's close personal relationship with the government's project manager has anything to do with this cockamamie approach to fulfilling one of the key recommendations of the 9/11 Commission.

Wall Street Journal: Flaws Found In Watch List For Terrorists

Over the last few weeks, there have been a smattering of reports about a modern-day David vs. Goliath struggle in federal contracting. In this saga, large government contractors are winning bids for contracts that are designated by the government for small businesses. At the end of July, the Small Business Administration (SBA) Inspector General released a report that found Blackwater USA may have won numerous contracts (39 in fact) set aside for small businesses. This report is the result of a request and investigation of Blackwater launched by House Oversight and Government Reform Committee Chairman Henry Waxman (D-CA) back in March. What might be the worst part of this is the SBA has repeatedly tried to hide the fact that huge companies were winning small business contracts.

The Blackwater case is not an isolated incident either, nor is this restricted to the SBA. According to Chris Gunn with the American Small Business League (ASBL), there have been more than a dozen federal investigations since 2003, all of which have concluded that Fortune 500 companies and other large businesses are winning contracts designated for small businesses. News reports, government investigations, and additional evidence make a pretty convincing case that Goliath is winning this battle despite government's efforts to the contrary, and has been for a while.

That's why I was surprised today when I got a press release from the ASBL warning about a new Bush administration policy that would make the reporting of annual revenue and number of employees optional for contractors when they register with the Central Contracting Registration (CCR) system (see CCR notice). That's right - this change would make it more difficult for the government to award small business contracts to small businesses. Past investigations have concluded that even when required to report this information, contractors deliberately mislead government officials, information that was provided was poor, and worst of all, government employees did not consider the poor quality of the information in making contracting decisions.

Well, then, what makes the administration think that this situation will be improved by having less information about whether companies are small or not? Granted there is more than one problem with the current system, but having too much information is not one of them. Once this rule is implemented, it will be that much harder for the government to award small business contracts to the right entities - something it is already having a very difficult time doing. Doesn't President Bush know that David is supposed to win?

The Federal Diary column in the Washington Post this week asked each of the presidential candidates a series of questions related to the federal workforce. Both columns are worth a quick read if you want to learn more about the candidates (see McCain and Obama), but I wanted to highlight one question in particular. Joe Davidson asked each candidate, "Federal labor leaders complain that outside contractors perform jobs that should be done by government employees. Do you favor any suspension of contracting out activities? Do you favor legislation that would prohibit the IRS from using appropriated funds to hire private tax collectors?" Below are their responses.

McCain:

If programs have a good record, and serve a vital national purpose that the private sector can't, they will receive continued funding. But I will not subordinate my commitment to the American people to ensure their tax dollars are spent wisely to the demands of labor leaders looking to swell the ranks of federal government unions.

I will make every aspect of government purchases and performance transparent. Information on every step of contracts and grants will be posted on the Internet in plain and simple English. We're not going to hide anything behind accounting tricks and bureaucratic doubletalk. Nor will I allow other procurement tricks that divert funds from national priorities. I will expand the use of fixed-price contracts to enforce discipline in the procurement process and ensure that clearly defined requirements are fulfilled, realistic schedules are kept, and costs don't exceed the promised price.

Too often, contractors underbid to 'buy into' a market with little expectation of delivering on schedule and within budget. At the same time, the government's cost estimates are often unrealistic. Fixed-price contracts based on realistic cost estimates with clear, consistent requirements will ensure that the contractor pays for cost overruns, not the taxpayers. We must also limit sole-source contracting and make cost discipline a priority using market competition to keep costs down and innovation up.

Obama:

Sen. Obama is concerned by the rising number of government contractors that are often unaccountable and frequently less efficient than government workers. As president, Obama will restore effective oversight of the government-contracting process and reduce our nation's increasing dependence on private contractors in sensitive or inherently governmental functions. Obama will eliminate the Bush administration's ideological bias towards outsourcing of government services and abandon initiatives, like the inefficient use of private bill collectors to collect federal taxes, that are a demonstrated waste of taxpayer money.

OMB Watch is a 501(c)(3) and does not participate in activities that support or oppose candidates for public office. This information is presented solely for informational purposes.

Government Executive's Robert Brodsky, who's been investigating and reporting on the internal machinations of DCAA, has obtained a series of internal DCAA memos. One of the memos betray a DCAA in "duck-and-cover mode" working to recover from a slew of criticisms leveled at the agency in the past month.

In late July, the Government Accountability Office (GAO) issued a report affirming allegations by employees that agency managers worked to issue audit findings favorable to several contractors despite lack of supporting evidence for the findings. The GAO report also noted that DCAA managers harassed and threatened auditors to discourage them from cooperating with GAO. A few weeks after the GAO report, GovExec reported the concerns of a dozen former DCAA employees that the agency subjugated audit quality to performance measurement metrics.

According to several agency officials, who spoke only on the condition of anonymity, the [Government Executive] article quickly circulated in DCAA offices and headquarters, causing concern among supervisors.

"Upper management is seriously scared right now," said one DCAA employee, who spoke on his cell phone for fear that the agency would check his office line. "Everyone is in duck-and-cover mode."

...

In the first [memo], issued on Aug. 6, [DCAA Director April] Stephenson announced that August, already almost one week old, had been designated as audit quality month.

"To recognize this initiative, we request that each office hold a stand down-day this month in which audit quality is discussed as a group," the memo stated. "The regional director or deputy regional director will participate in these conferences to further emphasize expectations and answer questions or concerns on audit quality."

One hopes that Stephenson is making a serious effort to right the listing agency, rather than throwing up some window dressing for the public (and congressional) consumption.

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.

I'm going to reproduce the following post by Think Progress's Matthew Ygelsias, because he's right on about the effectiveness of government per se: some agencies/departments carry out their mission better than others.

One of Megan McArdle's correspondents rants against the evils of the DC Department of Motor Vehicles before snarking " I can't wait for the government to take over our healthcare system."

A common enough sentiment. But look — the government already runs a fleet of air craft carriers. Worse! The government's taken over our national monetary policy — mistakes can plunge the country into recession or a destructive cycle of inflation. And as if that's not enough, they run a vast arsenal of nuclear warheads capable of destroying the entire planet. Which is just to say that if it's not conceivable that there could be a well-managed government agency, then we're all doomed irrespective of what happens with health care. But in fact if you look across the country or around the world, you see some highly effective public agencies and some highly dysfunctional ones. Obviously, you wouldn't want the health care system run like the worst of those agencies, but that's hardly to say that a highly effective government health care agency would be impossible to achieve.

Simply because an entity is a governmental entity guarantees neither success nor failure. However, one advantage that governmental entities do have over private entities is that the former, by definition, are subject to the demands of citizens for better execution.

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

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Wednesday, August 06, 2008

Tuesday, August 05, 2008