Caterpillar skirted $2.4 billion in taxes, Senate report says
Caterpillar skirted $2.4 billion in taxes, Senate report says
Industrial manufacturer Caterpillar shifted billions of dollars in profits from the United States to Switzerland over a decade to avoid paying $2.4 billion in U.S. taxes, according to a Senate report due out Tuesday.
Marty Sullivan figured out how the world’s biggest companies avoided billions in taxes. Here’s how he wants to stop them.
Companies that spent more on lobbyists than they paid in taxes
|Company||US profits||Taxes paid||Lobbying expense|
|General Electric||$10.46 billion||- $4.737 billion||$84.35 million|
|PG&E||$4.855 billion||- $1.027 billion||$78.99 million|
|Verizon Comm.||$32.518 billion||- $951 million||$52.34 million|
|Wells Fargo||$49.37 billion||- $681 million||$11.04 million|
|American Electric||$5.899 billion||- $545 million||$28.85 million|
|Pepco Holdings||$882 million||- $508 million||$3.76 million|
|Computer Sciences||$1.666 billion||- $305 million||$4.39 million|
|CenterPoint Energy||$1.931 billion||- $284 million||$2.65 million|
|NiSource||$1.385 billion||- $227 million||$1.83 million|
|Duke Energy||$5.475 billion||- $216 million||$17.47 million|
|Boeing||$9.735 billion||- $178 million||$52.29 million|
|NextEra Energy||$6.403 billion||- $139 million||$9.99 million|
|Con. Edison||$4.263 billion||- $127 million||$1.79 million|
|Paccar||$365 million||- $112 million||$760,000|
|Integrys Energy||$818 million||- $92 million||$710,000|
|Wisconsin Energy||$1.725 billion||- $85 million||$2.45 million|
|DuPont||$2.124 billion||- $72 million||$13.75 million|
|Baxter International||$926 million||- $66 million||$10.45 million|
|Tenet Healthcare||$415 million||- $48 million||$3.43 million|
|Ryder System||$627 million||- $46 million||$960,000|
|El Paso Corp.||$4.105 billion||- $41 million||$2.94 million|
|Honeywell||$4.903 billion||- $34 million||$18.3 million|
|CMS Energy||$1.292 billion||- $29 million||$3.48 million|
|Con-Way||$286 million||- $26 million||$2.29 million|
|Navistar||$896 million||- $18 million||$6.31 million|
|DTE Energy||$2.551 billion||- $17 million||$4.37 million|
|Interpublic Group||$571 million||- $15 million||$1.30 million|
|Mattel||$1.02 billion||- $9 million||$840,000|
|Corning||$1.977 billion||- $4 million||$2.81 million|
|FedEx||$4.247 billion||$37 million||$50.81 million|
|TOTAL||$163.79 billion||- $10.6 billion||$475.67 million|
Google, Amazon and Starbucks Face Questions on Tax
Former Google exec says he has 100,000 emails showing how ‘immoral’ company avoids paying UK tax
Businesses Are Winning Cat-and-Mouse Tax Game
By DAVID GELLES
August 28, 2014 7:45 pm
A pharmaceutical company moved its headquarters to Ireland, sharply reducing its tax rate. A billboard company reclassified itself as a real estate concern, meaning it will no longer pay corporate taxes. And a big oil producer split itself in two, cleaving off a multibillion-dollar division that now operates tax-free.
Across corporate America, companies large and small are finding new ways to address one of the business world’s oldest irritations: paying taxes.
By exploiting existing loopholes and devising new ones, some of the country’s best-known companies are making it harder than ever for the federal government to replenish its already depleted coffers.
As a result, business income tax revenue remains stagnant at about 2 percent of gross domestic product even as corporate profits hit records.
Business taxes now make up less than 10 percent of federal revenue, and in some years as little as 6.6 percent. That is sharply down from the years after World War II, when about 30 percent of federal revenue came from corporate taxes.
The decline is the result of the rise of untraditional business structures, the effects of a more globalized economy and a labyrinth of subsidies and tax credits. And though the erosion has happened gradually over decades, the surging popularity of inversions — acquisitions of overseas companies that allow American corporations to reincorporate abroad — is raising concerns that an already precarious situation is growing untenable.
“There’s been a long, slow, steady decline,” said William G. Gale, co-director of the Urban-Brookings Tax Policy Center and an economic adviser to President George H. W. Bush. “It’s a confluence of a bunch of things, and it’s increasingly difficult to figure out how to effectively tax corporations.”
Lawmakers in Washington are calling for an overhaul of the corporate tax code. Upon becoming chairman of the Senate Finance Committee this year, Senator Ron Wyden, Democrat of Oregon, said it was time to revamp the “dysfunctional, rotting mess of a carcass that we call the tax code.” But political gridlock makes the possibility of any quick action all but nonexistent.
While officials may not be in the mood to cooperate, they are taking notice of recent developments. Three tax-avoidance tactics in particular have grabbed the attention of lawmakers and the White House, though the root of the problem runs much deeper.
Most prominently, the number of inversions is at an all-time high, fueled by a rush of health care companies striking deals for overseas rivals.
AbbVie, which will become one of the 50 largest companies in the world through its $54 billion takeover of the Irish drug maker Shire, became the largest American company to strike an inversion. But more than a dozen other firms have made similar moves, most likely costing the government nearly $20 billion over the next 10 years, according to the Joint Committee on Taxation.
Republicans and Democrats have called for legislation to end inversions, even in the absence of broader corporate tax reform. But the threat of new laws to curb them only seems to be quickening the pace.
“Wall Street is whispering in the ears of all these corporate executives saying, ‘Congress might shut this down, you’ve got to do it now,’ ” said Rebecca J. Wilkins, senior counsel at the Institute on Taxation and Economic Policy.
Another corporate structure being exploited now more than ever is the master limited partnership. These partnerships are part of a broad class of companies known as pass-through entities because they pass all profits along to shareholders and are therefore exempt from paying corporate income taxes.
Dozens of these have been created in the last two years, reducing the Treasury’s income by about $1.6 billion annually, according to the Joint Committee on Taxation. Last year, the oil and gas company Phillips 66 spun out its pipeline assets into a master limited partnership, shielding millions of dollars in profits from taxation.
In response to the uptick in master limited partnerships, the Internal Revenue Service temporarily halted new approvals of the structure this year, and the Treasury Department said it was examining the effects on future tax revenue.
Another type of pass-through entity, the real estate investment trust, is also experiencing record popularity. Like master limited partnerships, real estate investment trusts pass profits along to investors, exempting them from corporate taxes.
But loose standards have allowed an ever wider variety of businesses to reclassify themselves as real estate investment trusts, broadening the universe of businesses avoiding taxes altogether. CBS Outdoor, the billboard company, relisted as a REIT this year.
And in a recent ruling, the I.R.S. allowed Windstream, a telecommunications firm, to spin off its underground cables and assorted real estate into a separate publicly traded company. Tax experts believe the ruling opens the door for a new wave of such transactions from a broad range of businesses.
Corporate advisers say that companies are pursuing these structures because, in the face of slow organic growth, executives are looking for additional profits wherever they can find them.
“It’s self-help tax reform,” said Kyle E. Pomerleau, an economist at the Tax Foundation. “If Congress is not willing to reform the corporate tax code, companies are going to do it for themselves.”
Despite the outsize attention in Washington being paid to the tax-avoidance techniques, they represent only a small part of the reason corporate tax revenue has declined so precipitously.
“Inversions are the very small end of the tail,” Mr. Gale said. “They just happen to be the part that’s wagging right now.”
The more fundamental issue is a series of systemic changes to the tax system and the shifting international tax landscape.
Over the years, a growing portion of the United States economy has shifted away from traditional corporations and into lower-taxed structures like partnerships and S-corporations, which are exempt from paying income taxes. This has put a growing swath of the economy beyond the reach of the I.R.S.
“It’s gotten much easier to never put money into the corporate sector, or to move it around internationally once it is in the corporate sector,” Mr. Gale said.
Only 6 percent of businesses are traditional corporations subject to the corporate income tax, according to the Congressional Research Service. That is down from 17 percent in 1980. The result is that less than half of the government’s business income comes from corporations, down from about 80 percent in 1980.
And while most S-corporations are small to midsize businesses, as was intended, some of the country’s largest private companies, including Bechtel, one of the country’s largest engineering firms, are also organized as S-corporations to avoid corporate income taxes.
“A lot of the income that used to be earned at the corporate level is now being moved to the S-corp level,” Mr. Pomerleau said.
And for those traditional corporations that are subject to the United States corporate tax rate, which at 35 percent is the highest in the world, there are myriad ways to avoid paying anything close to that. By taking advantage of a warren of credits, deductions and exemptions, corporations pay an average effective rate of just 12.6 percent, according to the Government Accountability Office.
Much of the tax avoidance comes as multinational corporations take advantage of overseas subsidiaries to shuffle money, intellectual property and assets into lower-taxed jurisdictions. In 2010, a majority of overseas profits reported by American firms were recorded in just 12 low-tax countries like the Netherlands, Bermuda, and Ireland, according to Citizens for Tax Justice.
That skewed distribution of profits is a result of the changed global tax landscape, where many countries have sharply lowered their corporate rates while the United States has not.
Those attractive overseas rates — and the fact that, unlike the United States, other countries do not tax international earnings — are among the reasons that companies are rushing to strike inversion deals.
“We cannot compete with zero,” Ms. Wilkins said.
Republicans and Democrats in Congress and the White House all agree the country is overdue for comprehensive tax reform. The last big revision of the tax code came in 1986. Before that, the previous rewrite was in 1954. But ideas on how to proceed vary wildly, diminishing the likelihood of any rapid reforms.
“There’s no primitive law of nature that every 30 years they will revise the tax code,” Mr. Gale said. “I don’t see much in terms of comprehensive tax reform happening with this Congress and this administration. It feels like they’re done talking to one another.”
Apple’s adventures in Ireland are just a hint of how much big firms have flocked to countries with low tax rates. A Congressional Research report found that in 2008 U.S. multinationals reported 43 percent of their overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands and Switzerland — places known more for having low tax rates than being the world’s biggest hubs of commercial activity. As a result, countries like the United States are seeing a fraction of the money they’re owed based on the 35 percent rate.
Apple ‘tried to find Holy Grail of tax avoidance’, US Senate committee claims
Apple tried to find the “Holy Grail of tax avoidance”, a US Senate committee has claimed, on the eve of chief executive Tim Cook’s appearance to answer questions on the tech giant’s offshore businesses.
Apple’s Web of Tax Shelters Saved It Billions, Panel Finds
By NELSON D. SCHWARTZ and CHARLES DUHIGG
Published: May 20, 2013
WASHINGTON — Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and went beyond anything most experts had ever seen, Congressional investigators disclosed on Monday.
The investigation is expected to set up a potentially explosive confrontation between a bipartisan group of lawmakers and Timothy D. Cook, Apple’s chief executive, at a public hearing on Tuesday.
Congressional investigators found that some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless — exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.
“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said Senator Carl Levin, a Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations that is holding the public hearing Tuesday into Apple’s use of tax havens.
“Apple successfully sought the holy grail of tax avoidance. It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.”
Thanks to what lawmakers called “gimmicks” and “schemes,” Apple was able to largely sidestep taxes on tens of billions of dollars it earned outside the United States in recent years. Last year, international operations accounted for 61 percent of Apple’s total revenue.
Investigators have not accused Apple of breaking any laws and the company is hardly the only American multinational to face scrutiny for using complex corporate structures and tax havens to sidestep taxes. In recent months, revelations from European authorities about the tax avoidance strategies used by Google, Starbucks and Amazon have all stirred public anger and spurred several European governments, as well as the Organization for Economic Cooperation and Development, a Paris-based research organization for the world’s richest countries, to discuss measures to close the loopholes.
Still, the findings about Apple were remarkable both for the enormous amount of money involved and the audaciousness of the company’s assertion that its subsidiaries are beyond the reach of any taxing authority.
“There is a technical term economists like to use for behavior like this,” said Edward Kleinbard, a law professor at the University of Southern California in Los Angeles and a former staff director at the Congressional Joint Committee on Taxation. “Unbelievable chutzpah.”
While Apple’s strategy is unusual in its scope and effectiveness, it underscores how riddled with loopholes the American corporate tax code has become, critics say. At the same time, it shows how difficult it will be for Washington to overhaul the tax system.
Over all, Apple’s tax avoidance efforts shifted at least $74 billion from the reach of the Internal Revenue Service between 2009 and 2012, the investigators said. That cash remains offshore, but Apple, which paid more than $6 billion in taxes in the United States last year on its American operations, could still have to pay federal taxes on it if the company were to return the money to its coffers in the United States.
John McCain of Arizona, who is the panel’s senior Republican, said: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.”
In prepared testimony expected to be delivered to the Senate committee by Mr. Cook and other Apple executives on Tuesday, the company said it “welcomes an objective examination of the U.S. corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy.”
The executives plan to tell the lawmakers that Apple does not use tax gimmicks, according to the prepared testimony.
Mr. Cook is also expected to argue that some of Apple’s largest subsidiaries do not reduce Apple’s tax liability, and to press for a sweeping overhaul of the United States corporate tax code — in particular, by lowering rates on companies moving foreign overseas earnings back to the United States. Apple currently assigns more than $100 billion to offshore subsidiaries.
Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland — where Apple had negotiated a special corporate tax rate of 2 percent or less in recent years — but keeps its bank accounts and records in the United States and holds board meetings in California.
Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdictions.
Apple Operations International has not filed a tax return in Ireland, the United States or any other country over the last five years. It had income of $30 billion between 2009 and 2012. By shuttling revenue between international subsidiaries, Apple was able largely to sidestep paying taxes, Congressional investigators said.
In the prepared testimony, Apple executives disputed the characterization of Apple Operations International. “A.O.I. performs important business functions that facilitate and enhance Apple’s success in international markets,” the testimony states. “It is not a shell company.”
The Senate investigators also found evidence that the company turned over substantially less money to the government than its public filings indicated.
While the company cited an effective rate of 24 to 32 percent in its disclosures, its effective tax rate was 20.1 percent, based on the committee’s findings. And for a company of Apple’s size, the resulting difference was substantial — more than $8 billion in 2009, 2010 and 2011.
Because of these strategies, tax experts say, Washington is forced to rely more and heavily on payroll taxes and individual income taxes to finance the government’s operations. For example, in 2011, individual income taxes contributed $1.1 trillion to federal coffers, while corporate taxes added up to $181 billion.
As companies’ earnings have accumulated offshore, many executives have been pushing more aggressively for a tax holiday that would allow them to bring back funds at lower tax rates. Apple has recently announced that it will return $100 billion to shareholders over three years through a combination of dividends and purchases of its own shares. Though Apple has enough cash on hand to pay for those initiatives, the company recently announced it would take on $17 billion in debt, rather than bring overseas money back to the United States to avoid paying repatriation taxes on those returning funds.
“If Apple had used its overseas cash to fund this return of capital, the funds would have been diminished by the very high corporate U.S. tax rate of 35 percent,” Mr. Cook is planning to testify, according to the prepared text. Apple “believes the current system, which applies industrial era concepts to a digital economy, actually undermines U.S. competitiveness.”
Critics, however, say these so-called repatriation holidays, which bring back funds at lower tax rates, do virtually nothing to stimulate the economy and benefit only corporations, their executives and shareholders. Congress enacted a repatriation holiday in 2004, allowing corporations to bring back about $300 billion from overseas and pay just 5.25 percent rather than the regular 35 percent corporate rate.
But a study by the National Bureau of Economic Research found that 92 percent of the repatriated cash was used to pay for dividends, share buybacks or executive bonuses.
“Repatriations did not lead to an increase in domestic investment, employment or R.&D., even for the firms that lobbied for the tax holiday stating these intentions,” concluded the study, which was conducted by a team of three economists that included a former Bush administration official. Tuesday’s hearing on Capitol Hill, along with the disclosures about Apple’s tax policies, are likely to make lowering repatriation taxes a more difficult proposition for lawmakers to stomach, Congressional staff members said.
On Capitol Hill Monday, legislators made plain their fury over what they called Apple’s “egregious” and “outrageous” conduct.
While other companies have taken advantage of loopholes, Mr. Levin said, “I’ve never seen anything like this and we don’t know anybody who’s seen anything like this.”
Starbucks, Amazon and Google accused of being ‘immoral’
Amazon, Google and Starbucks were yesterday accused of being “immoral”, “manipulative” and of “practising tax avoidance on an industrial scale”.
By Helia Ebrahimi, Senior City Correspondent
8:50PM GMT 12 Nov 2012
The US companies were branded a disgrace by MPs who uncovered information about Starbucks’ “sweetheart deal” with Dutch tax authorities and attacked Amazon in the face of revelations about a $252m (£142m) French tax probe.
The fiery exchange, led by Public Accounts Committee chairman Margaret Hodge, saw all three companies accused of siphoning profits away from Britain by using a complex web of accounting strategies that were cynical and “unjust”.
“We are not accusing you of being illegal,” said Mrs Hodge, “we are accusing you of being immoral.”
MPs also expressed shock at revelations that Starbucks had signed a secret deal in the Netherlands – where it has its European headquaters – to pay a discount rate of corporation tax. The PAC demanded Starbucks finance chief Troy Alstead substantiate claims that the terms of the agreement meant he was unable to detail the rate.
In the UK, Starbucks has paid £8.6m of tax in the last 14 years thanks to reporting losses on it audited accounts in all but one of those years. But Starbucks UK also pays a long list of fees for royalties, intellectual property rights and interest on loans to other Starbucks divisions in Amsterdam, Switzerland and to the parent company in the US.
In Amsterdam, Starbucks employs 220 people, compared with 6,500 in the UK, raising questions about where economic activity is concentrated.
In a further disclosure, it emerged that Starbucks’ Swiss business – which trades coffee, pays 12pc corporation tax and employs just 40 people – charges the UK arm a 20pc premium for the coffee it sells to it.
“Why can’t you pass on the benefits to the UK by not overcharging for coffee or billing inflated rates of interest?” said Mrs Hodge.
Mr Alstead said he felt “terrible” about the negative public perception and insisted the Seattle based company did everything it could to “behave ethically”. He claimed Starbucks had been a failure in the UK, pursuing an aggressive growth strategy that left the company saddled with a string of badly performing shops.
“This is the most competitive market in the world, “ said Mr Alstead, who pledged the company would pay more tax once it became more profitable.
Andrew Cecil, head of public policy at Amazon, was lambasted by Mrs Hodge for avoiding the Committee’s questions. She said she would “summon” Amazon’s most senior executives as a matter of priority to make up for Mr Cecil’s “unacceptable nonsence.”
Despite having its warehouses in the Uk and employing 15,000 people, Amazon drives all of its sales through Luxembourg.
“Your entire business is here but you pay no tax here and that really riles us,” said Mrs Hodge, who accused Mr Cecil of being clearly not “credible”.
Google, which admitted it used tax havens and chose jurisdictions where tax would be most “cost effective”, sells advertising space through its European headquarters in the Republic of Ireland, where the rate of corporation tax is 12.5pc.
Conservative MP Charlie Elphicke, who has been leading the criticism of US companies avoiding tax, said: “Billions of tax revenues are being lost to the UK. It’s clear from today that international tax avoidance is being conducted on an industrial scale.
“This is not just unfair on hard working honest UK taxpayers. It gives overseas companies an unfair competitive advantage over UK companies. That’s bad for our economic growth
“The tax abuse can be stopped. We can tighten UK tax presence rules, we can stop the ‘expenses’ used to cut business tax bills in the UK and we should refuse Government contracts for companies that don’t pay a fair share of tax in the UK. “
Mr Elphicke said Google’s tax charge for 2011 was $2.6bn globally, on income of $12.3bn. That says Mr Elphicke equates to 21pc tax rate. However, when you look at Google’s foreign income before tax of $7.6bn only $248m of tax was paid – the equivalent of 3.25pc. And in the UK, although declared earnings were £2.5bn, the tax charge was only £3.4m, the equivalent of 0.4pc of tax. Mr Elphicke says that if you applied the global operating margin to Google’s UK earnings you would be left with a £836m pre-tax profit, rather than a loss.
However, Mike Warbuton, senior partner at Grant Thornton said current attitudes risked sending the wrong message.
“There is a balance to be struck on this issue. We all have to pay our taxes and it is important that they are applied on a fair basis. At the same time it is vital for the UK to demonstrate that we are open for business and welcome investment from overseas. Multinational companies do not have to come here and if we drive them away our economy will suffer and jobs will be lost.”
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.”
“…to have Revenue there must be taxes; that no taxes can be devised, which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment, inseparable from the selection of the proper objects (which is always a choice of difficulties), ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate.”
Politicians, who can not look past the next election, and believe they can nibble on the margin of discretionary spending to save the country from the calamity of federal bankruptcy, are as deluded as an Egyptian dictator. Cutting the defense budget, gnawing at mandatory entitlements, Medicare and Medicaid, represents the only way spending can ever be reduced to balance the federal budget. Citizens, consumers, the electorate, require food and shelter therefore Social Security spending should remain untouched but those who are wealthy and qualify for Social Security, means testing, should be disqualified from receiving checks.
Obama to propose spending cuts in budget plan aimed at countering conservatives
By Shailagh Murray and Lori Montgomery
Washington Post Staff Writers
Sunday, February 13, 2010
President Obama will respond to a Republican push for a drastic reduction in government spending by proposing sharp cuts of his own in a fiscal 2012 budget blueprint that aims to trim record federal deficits by $1.1 trillion over the next decade.
Obama would reach his target in part by raising taxes, an idea that Republicans refuse to consider. But two-thirds of the savings would come from spending cuts that are draconian by Democratic standards and take aim at liberal priorities, such as a popular low-income heating assistance program and community development block grants.
Obama also targets the Pentagon, traditionally considered untouchable by both parties, by adopting $78 billion in savings proposed by Defense SecretaryRobert M. Gates.
The White House proposal, outlined Friday by a senior administration official, would barely put a dent in deficits that congressional budget analysts say could approach $12 trillion through 2021. But the policies would stabilize borrowing, the administration official said, while reversing the trend of ramping up spending to blunt the trauma of the recent recession.
…The 359-page measure filed Friday by House Republicans would cut $600 million from IRS budgets for enforcement and computer modernization and eliminate a program that puts thousands of police officers on local streets. It would also wipe out two decades of education initiatives by pulling nearly $5 billion from the Education Department, including funds for math and science and the popular Teach for America program, which puts well-trained teachers in needy schools.
And that is just the start for Republicans, who are eager to satisfy the tea party voters who helped the GOP win control of the House in November.
“Next week, we are going to cut more than $100 billion. And we’re not going to stop there,” House Speaker John A. Boehner (R-Ohio) told a conference of conservative activists Friday. “Once we cut the discretionary accounts, then we’ll get into the mandatory spending. And then you’ll see more cuts.”
In his new budget, Obama kicks the can one more time
By Dana Milbank
Tuesday, February 15, 2011
Our leaders are so good at kicking the can that it’s almost uncanny.
“The way we’ve dealt with it for most of the last decade,” White House budget director Jack Lew said Monday afternoon as he laid out President Obama’s new budget, “is simply to put the expense on our national credit card and to kick the can down the road. Well, this budget says we can’t do that anymore.”
In case you didn’t notice, that was a canned line.
Fed Chairman Ben Bernanke delivered his version of it to Congress last week in testimony about the debt crisis: “There is only so far that we can kick the can down the road. We have to address this, and the sooner we do it, the less painful it will be.”
Sen. Orrin Hatch (R-Utah) recited it, too, in the Republicans’ weekly radio address over the weekend: “Our massive debt must be confronted immediately. America cannot afford to kick this can down the road any longer.”
The president’s own fiscal commission, in its December report, endorsed the words of commission member Tom Coburn, a Republican senator from Oklahoma: “We keep kicking the can down the road and splashing the soup all over our grandchildren.”
At least a dozen other lawmakers over the last couple of weeks warned that cans can no longer be kicked. And now, as the president’s budget director says, the era of can-kicking is over. With the release of Obama’s budget proposal, Washington’s budgeting style can instead be described as tiptoeing past the can and hoping nobody notices.
Obama’s budget proposal is a remarkably weak and timid document. He proposes to cut only $1.1 trillion from federal deficits over the next decade – a pittance when you consider that the deficit this year alone is in the neighborhood of $1.5 trillion. The president makes no serious attempt at cutting entitlement programs that threaten to drive the government into insolvency.
Contrast that with the proposal by the heads of Obama’s fiscal commission, who outlined a way to cut $4 trillion from deficits through 2020, rein in entitlement spending, overhaul the tax code and reduce the government’s debt load. As commission co-chair Erskine Bowles, former chief of staff in Bill Clinton’s White House, told The Post’s Lori Montgomery, Obama’s budget is “nowhere near where they will have to go to resolve our fiscal nightmare.”
The best explanation the White House has come up with, uttered privately, is that Obama didn’t want to step out too far with politically unpopular cuts before congressional Republicans propose their own. And it’s true that Republicans haven’t yet committed to including entitlement reforms in their own 2012 budget. But even that doesn’t justify Obama’s feeble budget document, which squanders the little momentum built up by the fiscal commission.
Barack Obama tests bond markets with mega-deficits
US President Barack Obama faces a stiff battle with Republican foes in Congress after unveiling plans for $7.2 trillion (£4.5 trillion) of deficit spending over the next decade, and making little attempt to control the spiralling costs of social security and medical entitlements.
By Ambrose Evans-Pritchard, International Business Editor
8:32PM GMT 14 Feb 2011
Mr Obama proposed a budget that will push the this year’s deficit to a fresh record of $1.65 trillion or 11pc of GDP, partly due to payroll tax cuts agreed with Congress last Autumn. It is unprecedented to run deficits on this scale two years into recovery.
While he called it a budget of “hard choices and sacrifices” needed to return the US to a sustainable debt trajectory, the deficit is significantly above the $1.5 trillion recommended by the Congressional Budget Office (CBO).
Paul Ryan, Republican chair of the House Budget Committee, accused Mr Obama of a “total abdication” of leadership. “I expected more taxes, but I also expected more spending controls or reforms, but we’re not getting any of it.”
Mr Obama aims to cut $1.1 trillion in fiscal fat over the next decade. This relies on rosy growth forecasts and falls far short of the $4 trillion squeeze demanded by his own deficit commission. It would push the US national debt further into the danger zone.
The IMF already expects US gross public debt to double from 62pc of GDP in 2007 to 111pc by 2015, a figure that will now have be revised upwards.
The White House proposes a 5-year freeze in discretionary spending. This covers just an eighth of federal spending. Mr Obama has chosen not to court political fate by slashing entitlements, chiefly the trio of social security, medicare, and medicaid that ratchet ever upwards.
House Speaker John Boehner said the long-term cuts were not nearly enough. “We’re broke. Let’s be honest with ourselves,” he said, calling for every area of spending to be examined.
The Republicans could resort to the ‘nuclear option’ of shutting down the US government if Mr Obama refuses to meet them half way, but such Capitol Hill poker has to be played carefully.
The US Treasury market gave a muted reaction to the spending details yesterday, but some analysts fear this may be the calm before the next storm.
Ten-year yields have already jumped 120 basis points since October, partly on concerns over fiscal laxity. It remains unclear whether bond vigilantes will tolerate such extreme deficits once the Fed’s quantitative easing (QE) ends in June.
“The US is pushing its luck,” said Stephen Lewis from Monument Securities. “Markets sense that Obama is reluctant to cut spending before the election in 2012. The Fed may have to stop QE because the policy of asset purchases is pushing up commodity prices, and when that happens the bond markets could react in a very negative way.”
Mr Obama plans a big shift in energy policy, cutting subsidies for the oil and gas industry and rotating money into solar, wind, and other green energy sources. While he hoped to overhaul the US corporate tax system by closing loopholes and cutting the 35pc rate, there was no clear timetable.
Defence spending will increase this year by $22bn to $671bn to cover Afghanistan, and cyberwarfare threats, before facing a squeeze from 2013 onwards.
Nobel economist Paul Krugman said the Obama plan is “much less awful” than Republican austerity, arguing that the economy is not yet strong enough to withstand fiscal tightening. This is becoming a minority view outside Keynesian academic circles.
The CBO warned last month that debt interest is “poised to skyrocket” without drastic cuts. Fresh borrowing will reach $12 trillion over the next decade on current policies, pushing public debt to nearly 140pc under IMF measures. Even if Washington faces up to the crisis by raising taxes a third, debt interest costs will still jump from 1.5pc to 3.3pc of GDP.
While countries such as Japan can draw on a reservoir of domestic savings to cover big debts, the US has no such luxury. The savings rate is just 5.3pc. The US relies on Japan, China, and other foreigners to finance 40pc of its debt.
Discretionary spending involves funding for the USMC, USN, USAR, NASA, CIA, FBI, EPA, national parks, highways, education, green energy, and consumer protection. Congress negotiates these budgets with the president. During Fiscal Year 2010, discretionary spending was $1.39 trillion, 38% of the total budget. Most of this discretionary spending funded national security. Health and Human Services accounted for the next largest amount of spending. Mandatory spending amounted to $ 2.009 trillion…the deficit was $1.6 trillion. If all discretionary spending was eliminated in the current budget, the deficit would still exist.
Like Miss Cleo, politicians who speak out of both sides of their mouth, tell you what they think you want to hear, for it’s not what actually happens that matters, it’s what the public perceives to be happening, that counts.
It’s called leadership. Until Congress and the president agree that perhaps losing an election is preferable to inaction even though the electorate wants entitlements or winning an election by making difficult choices in order achieve a grand bargain to avert federal financial calamity, no meaningful change will come about. Speed Racer is careening toward a cliff: Chim Chim and Trixie can’t prevent the fatal crash.
Combined with slashing spending, revenue enhancement, more taxes, is the other necessary component to balance the federal budget. The rich crowd and ideologue Grover Norquist types believe taxes and government are evil: they suffer. Wealthy individuals and corporations who benefit the most from police and fire service to protection their person and assets are adept at avoiding paying their fair share of taxes.
If you’re a lawyer, doctor, or small businessperson who had a really good year, you’ll pay a 35% income tax on your income. If you manage a hedge fun, you’ll pay 15% on your income. That’s not a typo.
How can this be?
Hedge fund managers are paid on the 2-and-20 principle: They get 2% of the value of the hedge fund as compensation, no matter what. They also get 20% of any profits the hedge fund makes. For example:
1. Hedge Fund A is valued at $10 billion in Dec. 2009.
2. Hedge Fund Manager receives $200 million just for showing up to work.
3. Hedge Fund A is valued at $12 billion in Dec. 2010.
4. Hedge Fund Manager receives $400 million as a management fee.
The hedge fund manager will pay a 15% tax on his fees because a tax loophole holds that hedge fund compensation is treated as long-term capital gains. This makes no sense, since hedge fund managers are being paid a fee for their work. They are not investing their own money into the hedge fund. Instead, they are being paid a fee to manage the fund.
This tax loophole is so outrageous and illogical that I’ve stopped bringing it up at dinner parties. People don’t believe me. Yet power is not concerned with what is logical. Power is concerned with what can be done. “Do what thou wilt,” is the first principle of Satanism. And so hedge fund managers pay a 15% income tax rate.
There is no logical reason to treat hedge fund management fees different from other professional services fees. Yet the loophole persists, and anyone who argues that Wall Street doesn’t Congress should spend a few minutes explaining why hedge fund managers pay a lower income tax rate than other professionals.
Democrats want to reform the tax code, but Republicans are opposing it. Senator Orrin Hatch claimed: “Some others aren’t doing as well as they should and others are doing well. And one reason they can survive is if we don’t raise taxes.”
Hedge funds made record profits last year. There is a reason – taxpayers. Had Wall Street not been bailed out, nearly every hedge fund would have gone out of business.
Unless you have a net worth of $1.5 million, you can’t even invest in a hedge fund. If you have a 401(k), you invest in mutual funds. A mutual fund is not a hedge fund.
Hedge funds profit by exploiting mutual funds. The rich get richer by sniping your less-connected and less-sophisticated fund managers. If the guys managing your money at Vanguard could get a job in a Connecticut hedge fund, they wouldn’t be at Vanguard. To get a job in Connecticut, though, you need to have connections and a lack of morals. You must be able to obtain insider information – and have no moral scruples against violating the law by trading on it. Do as thou wilt.
Thus, most Americans would be better off if hedge funds failed. Hedge funds manipulate the stock markets, trade on insider information, and rob 99% Americans. They should should be prosecuted out of business.
Whatever the merits of hedge funds (there are none), hedge fund managers are earning money only because of the bailouts. How can those who have taken so much give back so little.
People complain about taxes, but paying 35% in income taxes is a nice problem to have. I’d rather pay 35% of 100,000 than 10% of 50,000. Wouldn’t you?
When 100% of your income resulted from government hand-outs, keeping giving back just over one-third seems like the right thing to do.
Nevertheless, it’s unlikely that the tax loophole will be closed. Republicans, the party of Jesus Christ, have rewritten the Gospels: Little will be required from everyone to whom much has been given.
Federal Reserve Chairman Ben Bernanke’s testimony before the House budget committee on Wednesday largely repeated what he has been saying recently. It was interesting only for its likewise repeated silences which, as so often, spoke loudly. The biggest silence concerned taxing corporations and the rich in the US.
Many sentences were devoted to the burdens of the huge deficits being run by the US government, to the need to reduce those deficits. Otherwise, Bernanke warned, lenders might one day stop providing those immense flows into the US Treasury. But not one word about reducing the deficit by taxing large corporations and the rich.
…It is worth remembering that when the US borrows trillions of dollars to cover deficits, a significant portion of that borrowing comes from the large corporations and richest individuals who lend to the government the money that, apparently, they did not have to pay in taxes to that government. I can see the desirability for them of lending at interest rather than being taxed. The matter looks otherwise from the standpoint of the rest of us.
Politicians, your public servants in Washington, allow these tax inequities to exist for billionaires who manipulate paper and corporations. Politicians crave dollars from contributors at the fund-raisers that allows them to finance their campaigns. CEOs, CFOs, their lawyers and Wall Street traders benefit, from broadband infrastructure that facilitates trades and highways that allow the movement of cheap goods from China into box stores.
The current economic downturn, brought about by “affordability products” or sub-prime loans, was allowed to happen because the politicians permitted the regulators to serve the self-interest of the market manipulators instead of the overall common good. Roland Arnall, owner of the predatory lender Long Beach Mortgage, developed a relationship with Deval Patrick, then an assistant attorney general in the Clinton administration. Patrick settled a Justice Department investigation into the lending practices of Long Beach favorably for Arnall. In 2004, Arnall made Patrick a board member of ACC Capital Holdings, parent company of Ameriquest Mortgage.
Ameriquest once was a prime sub-prime loan originator. In 2006, Ameriquest settled for $325 million in a forty-nine state class action that involved accusations of predatory lending and usury. Patrick had left the board and was elected governor of Mass in 2006. “In March 2007, as ACC was flailing, Governor Patrick made a call on behalf of Arnall. According to the Boston Globe, he phoned Robert Rubin, who was then the vice chairman of Citigroup and someone Patrick knew from the Clinton administration. A week after the call, Citigroup agreed to put fresh working capital into ACC. Arnall also contributed some of his personal wealth to keep the company going.”
Money, self-interest, talks on both sides of the aisle. In 2005, President Bush nominated Arnall for the ambassadorship to the Netherlands. He and his wife had raised $12 million for Republican causes and candidates. They had been appointed to the inaugural committee and managed to push a million dollars into the hands of Bush loyalists. In the time-honored way of the predatory rich (Andrew Carnegie, John D. Rockefeller) Arnall had developed a reputation as a philanthropist and during his hearing before the senate he received support from Republicans and Democrats. Arnall was confirmed by the senate in February 2006, one month after the $325 million settlement.
Loan originators such as Ameriquest, New Century, Ownit, and Countrywide were allowed to flourish because the government, bureaucrats, politicians, and Alan Greenspan, believed sound bank management principles and the markets would correct and compensate for human nature. They ignored warning signs of danger to capital markets and the entire economy that were apparent to astute observers such as Andrew Redleaf and Lew Ranieri who were not blinded by ideology. The rubber meets the road reason why the sub-prime mortgage fiasco occurred is because the big banks loaned money to the loan originators and then bought the mortgages. Then the banks bundled the mortgages into securities, those CDOs, that they sold to investors. Once the banks collected their fees the partners and traders raked in their bonuses, they were satisfied and no longer cared if the loans were repaid because the paper belonged to someone else.
Here was the ultimate consequence of the delinking of borrower and lender, which securitization made possible: no one in the chain, from broker to subprime originator to Wall Street, cared that the loans they were making and selling were likely to go bad. In truth they were all taking on huge risks in granting these terrible loans. But they were all making too much money to see it. Everyone assumed that someone else would be left holding the bag.
All The Devils Are Here: The Hidden History of the Financial Crisis, Bethany McClean and Joe Nocera
Michael Lewis, author of “The Big Short,” was far more favorable about the report but scarcely less fatalistic. “I feel like we’re living in a house built on sand because we didn’t reform the system,” he said on MSNBC’s “Morning Joe.” Noting that banks have returned to huge profits while helping themselves to zero interest loans, Lewis concluded that we still have “socialism for capitalists, and capitalism for everybody else.”
But it’s not just financial reform that has fallen short. We still don’t have cops to catch those who break the law. Which brings us back full circle to Madoff. Not the least of his cautionary tale’s subplots was the one starring Harry Markopolos, a private financial investigator and whistle-blower who repeatedly contacted the Securities and Exchange Commission for nearly a decade with evidence of Madoff’s fraud — only to be ignored.
Markopolos was lionized on “60 Minutes” and published a book, “No One Would Listen,” dramatizing his lonely crusade. And where is the S.E.C. today? Caught in the federal budget freeze — and bracing for further cuts by the antigovernment, antiregulatory Republican House — the agency can’t hire the employees needed to enforce existing security laws, let alone new ones created by the Dodd-Frank financial overhaul. It must use archaic technology to chase high-tech trading systems that operate “at the speed of light,” as Mary Schapiro, the S.E.C. chairwoman, put it. The agency’s new whistle-blower office — created precisely to welcome informants like Markopolos — has been put on hold
Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes
By Jesse Drucker – Oct 21, 2010 6:00 AM ET
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.
Google’s income shifting — involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” — helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.
“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”
The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.
Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. (See an interactive graphic on Google’s tax strategy here.)
The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.
Google, the third-largest U.S. technology company by market capitalization, hasn’t been accused of breaking tax laws. “Google’s practices are very similar to those at countless other global companies operating across a wide range of industries,” said Jane Penner, a spokeswoman for the Mountain View, California-based company. Penner declined to address the particulars of its tax strategies.
Facebook, the world’s biggest social network, is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to the company’s filings in Ireland and the Caymans and to a person familiar with its plans. A spokesman for the Palo Alto, California-based company declined to comment.
The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. Such income shifting costs the U.S. government as much as $60 billion in annual revenue, according to Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.
U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. International income-shifting, which helped cut Google’s overall effective tax rate to 22.2 percent last year, shows one way that loopholes undermine that top U.S. rate.
Two thousand U.S. companies paid a median effective cash rate of 28.3 percent in federal, state and foreign income taxes in a 2005 study by academics at the University of Michigan and the University of North Carolina. The combined national-local statutory rate is 34.4 percent in France, 30.2 percent in Germany and 39.5 percent in Japan, according to the Paris-based Organization for Economic Cooperation and Development.
The Double Irish
As a strategy for limiting taxes, the Double Irish method is “very common at the moment, particularly with companies with intellectual property,” said Richard Murphy, director of U.K.- based Tax Research LLP. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.
The high corporate tax rate in the U.S. motivates companies to move activities and related income to lower-tax countries, said Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP’s national tax practice in Boston. He delivered a presentation in Washington, D.C. this year titled “Transfer Pricing is Not a Four Letter Word.”
“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally,” Plotkin said in an interview.
Google’s transfer pricing contributed to international tax benefits that boosted its earnings by 26 percent last year, company filings show. Based on a rough analysis, if the company paid taxes at the 35 percent rate on all its earnings, its share price might be reduced by about $100, said Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Florida. He recommends buying Google stock, which closed yesterday at $607.98.
The company, which tells employees “don’t be evil” in its code of conduct, has cut its effective tax rate abroad more than its peers in the technology sector: Apple Inc., the maker of the iPhone; Microsoft, the largest software company;International Business Machines Corp., the biggest computer-services provider; and Oracle Corp., the second-biggest software company. Those companies reported rates that ranged between 4.5 percent and 25.8 percent for 2007 through 2009.
Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures.
“Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”
The U.S. National Science Foundation funded the mid-1990s research at Stanford University that helped lead to Google’s creation. Taxpayers also paid for a scholarship for the company’s cofounder, Sergey Brin, while he worked on that research. Google now has a stock market value of $194.2 billion.
Google’s annual reports from 2007 to 2009 ascribe a cumulative $3.1 billion tax savings to the “foreign rate differential.” Such entries typically describe how much tax U.S. companies save from profits earned overseas.
In February, the Obama administration proposed measures to curb shifting profits offshore, part of a package intended to raise $12 billion a year over the coming decade. While the key proposals largely haven’t advanced in Congress, the IRS said in April it would devote additional agents and lawyers to focus on five large transfer pricing arrangements.
Income shifting commonly begins when companies like Google sell or license the foreign rights to intellectual property developed in the U.S. to a subsidiary in a low-tax country. That means foreign profits based on the technology get attributed to the offshore unit, not the parent. Under U.S. tax rules, subsidiaries must pay “arm’s length” prices for the rights — or the amount an unrelated company would.
Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.
After three years of negotiations, Google received approval from the IRS in 2006 for its transfer pricing arrangement, according to filings with the Securities and Exchange Commission.
The IRS gave its consent in a secret pact known as an advanced pricing agreement. Google wouldn’t discuss the price set under the arrangement, which licensed the rights to its search and advertising technology and other intangible property for Europe, the Middle East and Africa to a unit called Google Ireland Holdings, according to a person familiar with the matter.
That licensee in turn owns Google Ireland Limited, which employs almost 2,000 people in a silvery glass office building in central Dublin, a block from the city’s Grand Canal. The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009.
Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.
The profits don’t stay with the Dublin subsidiary, which reported pretax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings.
Law Firm Directors
This Bermuda-managed entity is owned by a pair of Google subsidiaries that list as their directors two attorneys and a manager at Conyers Dill & Pearman, a Hamilton, Bermuda law firm.
Tax planners call such an arrangement a Double Irish because it relies on two Irish companies. One pays royalties to use intellectual property, generating expenses that reduce Irish taxable income. The second collects the royalties in a tax haven like Bermuda, avoiding Irish taxes.
To steer clear of an Irish withholding tax, payments from Google’s Dublin unit don’t go directly to Bermuda. A brief detour to the Netherlands avoids that liability, because Irish tax law exempts certain royalties to companies in other EU- member nations. The fees first go to a Dutch unit, Google Netherlands Holdings B.V., which pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.
The Dutch Sandwich
Inserting the Netherlands stopover between two other units gives rise to the “Dutch Sandwich” nickname.
“The sandwich leaves no tax behind to taste,” said Murphy of Tax Research LLP.
Microsoft, based in Redmond, Washington, has also used a Double Irish structure, according to company filings overseas. Forest Laboratories Inc., maker of the antidepressant Lexapro, does as well, Bloomberg News reported in May. The New York-based drug manufacturer claims that most of its profits are earned overseas even though its sales are almost entirely in the U.S. Forest later disclosed that its transfer pricing was being audited by the IRS.
Since the 1960s, Ireland has pursued a strategy of offering tax incentives to attract multinationals. A lesser-appreciated aspect of Ireland’s appeal is that it allows companies to shift income out of the country with minimal tax consequences, said Jim Stewart, a senior lecturer in finance at Trinity College’s school of business in Dublin.
Getting Profits Out
“You accumulate profits within Ireland, but then you get them out of the country relatively easily,” Stewart said. “And you do it by using Bermuda.”
Eoin Dorgan, a spokesman for the Irish Department of Finance, declined to comment on Google’s strategies specifically. “Ireland always seeks to ensure that the profits charged in Ireland fully reflect the functions, assets and risks located here by multinational groups,” he said.
Once Google’s non-U.S. profits hit Bermuda, they become difficult to track. The subsidiary managed there changed its legal form of organization in 2006 to become a so-called unlimited liability company. Under Irish rules, that means it’s not required to disclose such financial information as income statements or balance sheets.
“Sticking an unlimited company in the group structure has become more common in Ireland, largely to prevent disclosure,” Stewart said.
Technically, multinationals that shift profits overseas are deferring U.S. income taxes, not avoiding them permanently. The deferral lasts until companies decide to bring the earnings back to the U.S. In practice, they rarely repatriate significant portions, thus avoiding the taxes indefinitely, said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology.
U.S. policy makers, meanwhile, have taken halting steps to address concerns about transfer pricing. In 2009, the Treasury Department proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries.
Treasury officials, who estimated the policy change would raise $86.5 billion in new revenue over the next decade, dropped it after Congress and Treasury were lobbied by companies, including manufacturing and media conglomerate General Electric Co., health-product maker Johnson & Johnson and coffee giant Starbucks Corp., according to federal disclosures compiled by the non-profit Center for Responsive Politics.
While the administration “remains concerned” about potential abuses, officials decided “to defer consideration of how to reform those rules until they can be studied more broadly,” said Sandra Salstrom, a Treasury spokeswoman. The White House still proposes to tax excessive profits of offshore subsidiaries as a curb on income shifting, she said.
The rules for transfer pricing should be replaced with a system that allocates profits among countries the way most U.S. states with a corporate income tax do — based on such aspects as sales or number of employees in each jurisdiction, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School.
“The system is broken and I think it needs to be scrapped,” said Avi-Yonah, also a special counsel at law firm Steptoe & Johnson LLP in Washington D.C. “Companies are getting away with murder.”
The Paradox of Corporate Taxes
By DAVID LEONHARDT
Published: February 1, 2011
The Carnival Corporation wouldn’t have much of a business without help from various branches of the government. The United States Coast Guard keeps the seas safe for Carnival’s cruise ships. Customs officers make it possible for Carnival cruises to travel to other countries. State and local governments have built roads and bridges leading up to the ports where Carnival’s ships dock.
But Carnival’s biggest government benefit of all may be the price it pays for many of those services. Over the last five years, the company has paid total corporate taxes — federal, state, local and foreign — equal to only 1.1 percent of its cumulative $11.3 billion in profits. Thanks to an obscure loophole in the tax code, Carnival can legally avoid most taxes.
It is an extreme case, but it’s hardly the only company that pays far less than the much-quoted federal corporate tax rate of 35 percent. Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.
Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.
“A dirty little secret,” Richard Clarida, a Columbia University economist and former official in the Treasury Department under President George W. Bush, has said, “is that the corporate income tax used to raise a fair amount of revenue.”
Over the last five years, on the other hand, Boeing paid a total tax rate of just 4.5 percent, according to Capital IQ. Southwest Airlines paid 6.3 percent. And the list goes on: Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.
Economists have long pleaded for an overhaul of the corporate tax code, and both President Obama and Republicans now say they favor one, too. But it won’t be easy. Companies that use loopholes to avoid taxes don’t mind the current system, of course, and they have more than a few lobbyists at their disposal.
The official position of the Business Roundtable, one of the most important corporate lobbying groups, is telling. The Roundtable says it supports corporate tax reform. But it actually favors only a reduction in the tax rate. The group refuses to say whether it also favors a reduction of loopholes. In effect, the Roundtable wants a tax cut for its members regardless of how much the tax code is simplified — or whether the budget deficit grows.
The tax filings of companies, like those of individuals, are confidential. In their public reports to investors, however, companies are required to list something called “cash taxes paid” — the total amount of corporate income tax they paid that year, be it to foreign governments, the United States government or state and local governments.
This number varies significantly from year to year, depending on how many loopholes a company qualifies for. So looking at a single year’s number is often misleading. But in a 2008 academic paper, three accounting professors — Scott Dyreng of Duke, Michelle Hanlon of M.I.T. and Edward Maydew of the University of North Carolina — suggested a new method for analyzing corporate tax avoidance.
It compares cash taxes paid over several years — like five, as in the analysis for The Times — to pretax earnings over that same period. The accounting experts I interviewed called it the best available method for looking at corporate taxes.
Some obvious patterns emerge. Companies that lost large amounts of money in previous years can subtract these subsequent losses from their initial profits and avoid taxes until they’re turning a consistent profit. Yahoo falls into this category. Of all the reasons to have a low tax rate, this one may be the most defensible, economists say.
Other companies are able to avoid taxes by spending large sums on new equipment or buildings. Such spending can often be deducted. Southwest Airlines, for instance, has bought a lot of planes in the last five years. Several energy companies with tax rates below 2 percent, like NextEra, Xcel and Range Resources, have likewise been expanding.
A third group of companies simply seems to have become expert at avoiding taxes. When the three accounting professors analyzed more than 2,000 companies, they found big variations in tax rates within almost every subset of companies. Companies in the same industry often paid very different rates, even when they were similar in size.
G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm’s. One common strategy is maximizing the amount of profit that is officially earned in countries with low tax rates.
Carnival pays so little tax partly because of a provision that lets some shipping companies legally incorporated overseas (Panama, in Carnival’s case) avoid taxes. The fact that Carnival’s executives sit in Miami and or that many passengers board in Baltimore, Los Angeles, Miami, New York and Seattle doesn’t matter. Nor does the fact that Carnival isn’t paying much tax in Panama.
Companies that pay relatively high rates tend to be those that are not expanding rapidly and that are not as ingenious as G.E., at least on taxes. The average total tax rate for the 500 companies over the last five years — again, including federal, state, local and foreign corporate taxes — was 32.8 percent. Among those paying more than the average were Exxon Mobil, FedEx, Goldman Sachs, JPMorgan Chase, Starbucks, Wal-Mart and Walt Disney.
The problem with the current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company — and that are indeed inefficient for the larger economy — can make sense when they bring a big tax break. “Companies should be making investments based on their commercial potential,” as Aswath Damodaran, a finance professor at New York University, says, “not for tax reasons.”
Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success.
Inefficiencies like these slow economic growth, and they are the reason that both conservatives and liberals criticize the corporate tax code so harshly. Mitch McConnell, the Republican Senate leader, says it hurts job creation. Mr. Obama, in his State of the Union address, said that the system “makes no sense, and it has to change.”
A lot of economists agree. Then again, any system that creates as many winners as this one won’t be changed easily.
Most firms pay no income taxes – Congress
Study finds that the majority of domestic and foreign corporations in the United States avoid paying federal income taxes.
Make Lots of Money and Avoid Paying Taxes
By One Measure, Federal Taxes Lowest Since 1950
Monday, February 7, 2011
Taxes too high?
Actually, as a share of the nation’s economy, Uncle Sam’s take this year will be the lowest since 1950, when the Korean War was just getting under way.
And for the third straight year, American families and businesses will pay less in federal taxes than they did under former President George W. Bush, thanks to a weak economy and a growing number of tax breaks for the wealthy and poor alike.
Income tax payments this year will be nearly 13 percent lower than they were in 2008, the last full year of the Bush presidency. Corporate taxes will be lower by a third, according to projections by the nonpartisan Congressional Budget Office.
The poor economy is largely to blame, with corporate profits down and unemployment up. But so is a tax code that grows each year with new deductions, credits and exemptions. The result is that families making as much as $50,000 can avoid paying federal income taxes, if they have at least two dependent children. Low-income families can actually make a profit from the income tax, and the wealthy can significantly cut their payments.
“The current state of the tax code is simply indefensible,” says Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee. “It is hemorrhaging revenue.”
In the next few years, many can expect to pay more in taxes. Some increases were enacted as part of President Barack Obama’s health care overhaul. And many states have raised taxes because — unlike the federal government — they have to balance their budgets each year. State tax receipts are projected to increase in all but seven states this year, according to the National Council of State Legislatures.
But in the third year of Obama’s presidency, federal taxes are at historic lows. Tax receipts dropped sharply in 2009 as the economy sank into recession. They have since stabilized and are expected to grow by 3 percent this year. But federal tax revenues won’t rebound to pre-recession levels until next year, according to CBO projections.
In the current budget year, federal tax receipts will be equal to 14.8 percent of the Gross Domestic Product, or GDP, the lowest level since Harry Truman was president. In Bush’s last year in office, tax receipts were 17.5 percent of GDP, just below their 40-year average.
The lack of revenue, combined with big increases in spending, means the federal government will have to borrow 40 cents for every dollar it spends this year. The annual federal budget deficit is projected to reach a record $1.5 trillion.
Lawmakers from both political parties vow to tackle the nation’s financial problems. Republicans in Congress promise big spending cuts, and Obama says he wants to reshape corporate taxes, closing loopholes to pay for lower overall rates. Few in Washington, however, are calling for big tax increases, at least in the short term.
“America’s tax system is clearly broken,” Donald Marron, a former economic adviser to Bush, told the Senate Budget Committee at a recent hearing. “It fails at its most basic task, which, lest we forget, is raising enough money to pay for the federal government.”
At the request of The Associated Press, The Tax Institute at H&R Block compared 2008 and 2010 tax bills for families at various income levels, showing how their taxes have changed since Obama took office. Taxpayers are filing their 2010 tax returns this spring, while 2008 was the last full year that Bush was president. The scenarios assume that each family had the same income, filing status and number of dependent children in both years.
Income tax rates remain unchanged. But many taxpayers are seeing their bills drop under Obama because of more generous tax credits for college students, working families, homebuyers and the working poor. Many of the changes were enacted as part of the big economic stimulus package passed in 2009.
Congress also extended Bush-era tax cuts through 2012. Lawmakers let Obama’s Making Work Pay tax credit expire at the end of 2010, but they replaced it with a one-year cut in Social Security payroll taxes that is already showing up in workers’ paychecks.
• A married couple with two young children and a combined income of $25,000 will pay no federal income taxes for 2010. Instead, they’ll get a payment of $7,085 — up from $6,700 in 2008. The larger payment comes mainly from a more generous Earned Income Tax Credit, which provides subsidies to the working poor. They will also get a $1,000-per-child tax credit. The example illustrates how complicated tax returns can be, even for low-income families, said Kathy Pickering, executive director of The Tax Institute at H&R Block.
• A married couple with two children, including one in college, and a combined income of $50,000 would pay no federal income taxes, instead getting a payment of $734 from the government this year. However, they did better in 2008 when they netted a $1,234 payment from the government. That’s because Obama’s Making Work Pay credit was worth less to them than the Bush-era economic stimulus payment they received in 2008.
• A single person making $50,000 while paying interest on a student loan would have a 2010 tax bill of $5,325 — a $63 decrease from 2008. The difference is due to an inflation-based increase in the standard deduction and personal exemption.
• A married couple with two children, including one in college, with some modest investments and a combined income of $200,000 will see their federal income tax bill drop by $780, to $28,496. Their tax bill is lower than in 2008 largely because itemized deductions are no longer limited for high-income families.
• A rich couple with two kids in college, larger investments and a combined income of $1 million will see their taxes drop by $6,740, to $277,699 in 2010. Their tax bill is lower than in 2008 because they were able to defer a larger portion of their income to retirement accounts, and because itemized deductions are no longer limited for high-income families.
The real Reagan legacy
By Robert J. Samuelson
Friday, February 11, 2011
…As for conservatives, they argue that Reagan’s tax cuts explain the 1980s economic revival, when the more important cause was controlling the inflation that had bred four previous recessions (1969, 1973, 1980, 1981). Once inflation fell, so did interest rates, and the economy recovered rapidly. Imagine Reagan’s reelection prospects if double-digit inflation had persisted. There would have been no “Morning Again in America.” Despite cuts in tax rates, the overall tax burden dropped only from 19 percent of GDP in 1980 to 18.3 percent in 1989.
Little of this matters to the politicians and pundits who use Reagan for their own purposes. History be damned.
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