Thursday, June 23, 2011

Why Can't We Get Good Data on Corporate Tax Rates?

And why does it consistently come from firms with a material interest in lowering taxes, and therefore embellishing current rates?

Politifact Virginia recently reviewed comments by George Allen which claimed that the US tax rate on corporations is 35% - 2nd "worst" in the world, according to him. Politifact argued that the rate was 27.6% (the official "effective" tax rate) - 4th highest in the world. Comprehensive accounting might place the real US corporate tax rate as lowest among all industrialized nations. The conservative Tax Foundation places the rate at only 24.1%. Whatever the case, US corporations have paid more taxes overseas than in the US since 2008, relying on accounting practices that transfer profits out-of-state or overseas, while sales are mostly captured at home - taking advantage of a high-cost consumer infrastructure without having to pay for that platform.

Like so many economic indicators, the official corporate tax rate has a very important function in politics. In the context of a political philosophy which conflates job creation with accumulation of wealth, higher corporate tax rates provide political capital which allows for a more effective lobbying effort to lower taxes. Capitalist graft, therefore, has two incentives in its model of accounting and government graft:

  • to diminish the apparent profits reported to governments, while maintaining (or even expanding) profits reported to stockholders
  • to maintain official tax rate figures
Reagan's Accounting Fraud

Taxes are all about accounting for value. Any functioning government has to maintain a certain degree of control over its domestic product, income and consumption, each of which roughly translate into demand for government services. Largely, these services are infrastructure-based: greater interstate trade means higher road upkeep, and expanded financial trading places greater burden on regulatory and structural agencies. This means that a growing economy needs to be supported by tax revenue that grows at a corresponding rate. This rate is largely

Internally, taxed entities are required to maintain accounting practices that correctly reflect the rate of profit, assets, capital and labor expenses. Of course, assets depreciate, so the tax rate needs to reflect this diminishing value. Typically, as assets go down in value, the taxes levied on those assets goes down with it, until the asset is discarded or sold.

But the rate of depreciation recognized by tax rates took a curious turn in 1981, when the longest recognized life of assets was cut from 60 years to 15 (5 years later, this was raised to 39 years). Modified Accelerated Cost Recovery System (MACRS) further provides yearly deductions to taxes levied based on the expected life of an asset. Assets expected to last 10 years will lose 10% of the original value each year. Furthermore, an extra 50% deduction is provided on certain years of the asset's life:
"Thus, under ACRS, the tax treatment of a $100,000 bulldozer works roughly like this: The company begins by claiming a $30,000 deduction for depreciation. This means that a $30,000 deduction will exempt (shelter) $30,000 of the company's profits from tax; since the corporate tax rate is 46 percent, the deduction will save the company nearly $15,000. Next, the company claims a $10,000 investment-tax credit, which is subtracted directly from its tax bill. (The 10 percent investment-tax credit has existed in various forms since 1962.) Combined, the two tax breaks save the company $25,000. After the first year, the bulldozer produces no credits, since the investment-tax credit is a one-time benefit, but depreciation continues. Eventually this tax treatment will be even more generous. The declining balance will increase to 175 percent in 1985 and to 200 percent in 1986." -Gregg Easterbrook: The Myth of Oppressive Corporate Taxes
When MACRS was finally passed in 1986, it was retroactive to 1981 - accelerating the depreciation clause by 5 years. This tax credit can be effectively refunded to companies which are not profitable enough to balance the credit against taxes owed - this is done by leases of equipment carrying lucrative tax deductions. Non-taxable entities are even allowed to sell their asset depreciation "tax credit" to firms which have tax liabilities. Easterbrook estimates that as much as 60 Billion in corporate taxes have been cut with this legislation.

Non-taxable income

The corporate world has set up and lobbied for some very crafty ways to expand their revenue streams:
  •  1 Billion annually is provided to retailers for the "cost of collecting sales tax" - this is in the form of sales taxes collected by retailers, but exempted from remittance to state treasuries.
  • Companies hide income in their subsidiaries, often out-of state, by marking transfers of money as "costs" - reducing state tax income by billions annually.
  • Companies do not have to pay income tax in states where they have no "physical presence," which does not include sales.
  • An estimated 33 Billion annually is lost to overseas tax havens
  • Taxable income has fallen from 98% of gross profits in 1987 to 72% in 2007. Much of corporate profit has shifted to upper management in the form of salaries and bonuses, which carry a lower tax rate.
  • The Tax Foundation estimates the total cost of "tax expenditures" (tax loopholes) to the US gov't at 628.6 Billion over 5 years.
Why This is a Problem and Politifact is Wrong

Much of this data is in a vacuum. The net accounting for the transfer of money can only tell us so much - equally important, though immensely hard to quantify, is the value that firms enjoy from government services, including services provided to consumers and workers. Healthcare provisions, for instance, almost always end up in the coffers of the medical industry - and without commensurate innovation and expansion of capital, government-backed payments will be routinely overpriced. A rough estimation of this value is explained by Wil B.:
"And when it's all added up, American companies are paying a far smaller share of taxes than those in many other countries. In the US, corporate taxes accounted for 1.3% of GDP in 2010, while in most other industrialized nations the amount was nearly double, at around 2.5%." Wil B.: The Unfunny Joke of High Corporate Taxes
The Tax Foundation disagrees with this characterization  - drawing on largely anti-tax sources, it determines the rate to be close to 24.1% from 2001-2008. Japan, Morocco, Italy, Indonesia and Germany all had higher rates than the official 2009 rate of 27.7%.

What's more - many of these tax loopholes are not accounted for in official data on "effective" tax rates, which are largely from Pricewaterhousecoopers - a firm that specializes in helping clients avoid taxes. One might as well ask for UBS to tell the US Government what taxes its clients owe without an IRS audit - much like they did to resolve the 2008-2009 whistleblower crisis. Birkenfeld ratted out UBS, which led to a painstaking (painstakingly white-washed) inquiry resolving in a fraction of unpaid taxes remitted to the IRS, 200 small-time tax-dodger's names given up, and a prison sentence for the whistleblower - the only UBS official to receive time for the case.

Indeed, the data seem quite conclusive - the Government is desperate to give more and larger corporate handouts, and it uses every means at its disposal to obfuscate data to this end. For my part - I'll rate Politifact's analysis as "useful idiocy."

UPDATE: Yves Smith has this to say about corporate taxes:
"Measuring taxes paid by companies is imprecise because tax filings remain private. In many cases, the estimates reported in a company’s financial filings with regulators overstate taxes paid in a year because they include deferred taxes. Nonetheless, academics, economists and elected officials use the estimates for comparative purposes." Yves Smith: Links 5-3-11


  1. Small businesses are the victims of tax policy. Capitalism works in markets of competition, but it isn't about a better burger or a higher quality experience. Competition has effectively been destroyed by tax policy combined with mandatory insurance requirements. Small businesses looking to expand hit a thick wall when it comes to hiring new employees when they stay within the confines of compliance. The complexity of compliance is the main obstruction to successful small business expansion.

  2. It's a dynamic I haven't posted about yet, but the standardization of industry in such a way that new or non-hegemonic organizations are forced to have greater relative costs is a definite strategy of powerful economic regimes. Antonio Gramsci discusses some of these points, he's been increasingly useful as a source, too.


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