Tuesday, August 19, 2008

Corporate tax: the series

Over the next few days, boys and girls, Spot is going to write a little about how corporations are taxed.

Um, Spotty, may I be excused?

No, grasshopper, you may not.

You sure know how to ruin a good time, Spot.

Spot will make this as painless as possible, but it's a topic in the news and one that's not well understood. A recent report by the Government Accountability Office found:

During the eight-year period covered by the report, 72 percent of foreign-owned corporations went at least one year without owing taxes, and the same was true for 55 percent of domestic corporations.

Here's a pdf of the actual report. It was a report requested by Senators Carl Levin and Byron Dorgan, and one of its principal purposes was to determine if foreign-controlled domestic corporations (FCDCs) paid comparatively less than US-controlled corporations (USCCs). Obviously, based on the quotation above, they do.

But the thing that got people's attention was the fact that over half of USCCs paid no tax for at least one year during the period covered by the report.

Before digging right in, boys and girls, a few things need to be understood. In the case of both the FCDCs and the USCCs are corporations incorporated somewhere in the United States; the only difference between them is whether they are "controlled," that is owned, by foreign or domestic (US) persons or entities.

As a result of this, we are leaving out foreign companies that just sell into the United States without having a so-called "permanent establishment" here. There are tax treaties usually in place for that kind of business to be conducted without giving rise to income taxes. Many US companies do this in foreign countries, too, the theory being that the earnings will be taxed in the corporation's domicile and the income is considered to be earned entirely there.

Got it? The importance of this is that the GAO report is comparing apples to apples. So far so good.

A lot of the no-taxes-paid numbers come from small potatoes: closely-held corporations that may be new, or run in a way to take money out of the corporation in deductible ways (like interest and royalties paid and not dividends) and not to show a profit to passive, especially public, shareholders, or genuinely unprofitable small companies. The attrition rate for small companies is breathtakingly high. Spot had a lawyer friend, boys and girls, who used to say that he had a flat fee for representing a new restaurant from the incorporation though the bankruptcy.

Kinda lawyer gallows humor, but you get the idea.

We can let all the chaff blow away, and we're left with about one percent of the companies that mean a lot according to the GAO:

We also report separately for large corporations - those with at least $250 million in assets or $50 million in gross receipts - because, while they account for less than 1 percent of all corporations, they make up over 90 percent of all assets reported on corporate returns.

These are, of course, the big multi-nationals. Here is what the GAO found out about the one percenters specifically:

In the 8 years from 1998 through 2005, large FCDCs in a panel data set that we analyzed consisting of tax returns that were present in the SOI corporate files in every year were more likely to report no tax liability over multiple years than large USCCs in the same panel data set. As figure 2 shows, about 72 percent of FCDCs and 55 percent of USCCs reported no tax liability for at least 1 year during the 8 years. About 57 percent of FCDCs and 42 percent of USCCs reported no tax liability in multiple years—2 or more years—and about 34 percent of FCDCs and 24 percent of USCCs reported no tax liability for at least half the study period—4 or more years. A correspondingly higher percentage of USCCs reported a tax liability in all 8 years, 45 percent for USCCs and 28 percent for FCDCs.

The first set of numbers in the paragraph above are, of course, the ones that were reported in the article linked above. More significant to Spot is the fact that between a quarter and a third of the corporations paid no taxes for at least half of the study.

Boy, Spot, there are sure a lot of big companies out there that aren't good at making any money!

It would seem that way, wouldn't it grasshopper? And that's what Perfesser Banaian wants you to think. He says that most of the companies had no taxable income. And because they paid no income tax, that proposition is probably understood by the most casual observer.

But zero "taxable" income and an actual operating loss are two different things. Next time, we will examine a few ways in which that can be possible.

No comments: