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Senators Levin and Isakson: millionaire surtax vs corporate repatriation subsidy

by Linda Beale

Senators Levin and Isakson: millionaire surtax vs corporate repatriation subsidy

The PBS News Hour last night interviewed Senators Levin and Isakson on the jobs bill (video and transcript available here).

Isakson was first off.  He sounded like a right wing sound bite machine: we’re overregulating businesses so we need a “time out” on regulation.  And we need to pass a repatriation tax holiday so businesses can get the money they need to invest and create jobs.

Levin was asked what he thought about that.  He didn’t even comment on the repatriation sound-bite–after all, he has a report just out that investigates the idea of repatriation and concludes it was a losing proposition.   See  Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals, Permanent Committee on Investigations Majority Staff Report, Senate (Oct. 11, 2011) (listing a series of findings showing that repatriation failed to accomplish its goals).**

But Levin did respond to the “it’s regulations and taxes that are killing job creation” GOP mantra.  A recent poll of small business owners showed that small business owners aren’t worried about regulations or taxes.  They just need customers.   So you can help things out by helping small businesses and helping people become customers.

Makes sense, doesn’t it?  It’s certainly an argument made here on ataxingmatter many times: the way to create customers is to stop the collapse of the American middle class with programs like infrastructure projects.

Woodruff then asked Isakson what he had to say to that.  His response–yeah, well, the vote we have tonight is the pay-for–a surtax on millionaires.  And there are 392,000 small businesses that a surtax on millionaires is going to hurt.

So now Woodruff asks Levin what about this argument that the surtax is gonna hurt small businesses.

Levin set the facts straight on his colleague’s claim that a surtax on millionaires would hurt all those small businesses.  He said quite clearly that the facts show that only a very small percentage of small business owners earn the million that would put them in the group subject to the surtax.  So the issue is taxing millionaires, whose share of the income has skyrocketed in the last few years compared to the middle class, which has stagnated.  The surtax would mainly hit the overpaid CEOs of big corporations, etc.

Funny, Judy Woodruff (an undergraduate classmate of mine back at Duke, by the way) didn’t blink an eye.  You’d think the next question to Isakson would be–given the fact that only a tiny proportion of small businesses would be subject to the millionaire surtax, Senator, a fact that has been pointed out numerous times, why do you insist on claiming that it would hurt all small businesses.  But she didn’t.  The PBS station is worried about appearing “balanced” and that means you can’t call a fact a fact and point out that a presenter is stating something that isn’t supported in the facts.  You let an interviewee do it, if they can get it in, but you let the other side get by with continuing to repeat its fact-less sound bites.

So Senator Isakson’s response was:

[Senator Levin’s] response to that question just proves this is all about political messaging and really doesn’t have anything to do with purpose, because if they really cared about small business, they would exempt limited liability corporations, S-corporations and sole proprietorships from the application of this tax. Then they’d only be taxing millionaires. But they’re going after small business as well.\

Now, folks, that’s a ridiculous response.  (Woodruff didn’t say that, but I will.)  It’s ridiculous because Levin gave the facts–small businesses don’t complain about regulations, most small businesses don’t make millions and wouldn’t be subject to the surtax.  And Isakson had the gall to call that factual response “political messaging” , even while Isakson continued with his GOP soundbite political message campaign of implying that small businesses need to be protected from the millionaires surtax!

Note also that Isakson suggested that tif there had to be a surtax, it should exempt LLCs, S corporations and sole proprietorships.  He offered no justification whatsoever for that terribly broad exemption (other than the proffered “it’ll hurt small businesses that Levin already soundly defeated).  If you’re making millions from your business, you are successful enough to pay the tax.  If you are not, you won’t have to pay the tax.  If you exempt LLCs (mostly operated as partnerships) and S corporations and sole proprietorships, you are exempting a lot more than small businesses!  Those include hedge and private equity funds (some managers of which make hundreds of millions a year), real estate partnerships, huge businesses operating as sole proprietorships, and  people like John Edwards who make millions through their S corporations etc. etc. etc.  If you couple that with the zero taxation on capital gains that most on the right are pushing for, that’d likely mean that the CEOs of multinational corporations would be the ONLY millionaires and gazillionaires that the tax would hit!

But did Judy follow up along those lines?  Nope.  Instead she asked Isakson whether the country doesn’t need stimulus rather than cutting at this fragile time for the economy.

His response was to deliver the right wing political message yet again:

1.  the right’s response to the fact that the last stimulus made a huge difference–a claim that it didn’t solve tthe problem permanently (with the implication that we might as well not have done it).  Says Isakson (paraphrasing):  Last bill paid teachers, but once the bill is gone, there’s no money to pay them.  (Implication–the stimulus was useless.  I doubt that the teachers whose jobs were saved for a few years would agree or the students who were saved from overcrowded classrooms or the lack of a music program.)

2.  the right’s response to the need to enact a stimulus rather than cutting–we’ve got a debt problem and a debt crisis.   Isakson says “we’re at the breaking point on leverage” so he wants to “inspire the private sector to reinvest in our country and reinvest in businesses.”   (of course, this overlooks the fact that the “debt crisis” was caused by right-wing obstructionism. or that the US Treasury can borrow now at the cheapest rate we can expect to see forever once this crisis ends–we should borrow cheap while we can, spend it on infrastructure and job creation.  It also roundly ignores the historic pattern that businesses won’t invest in US business when (a) we allow them to expatriate assets to create businesses abroad without taxing them on the built in gains in those assets, (b) we allow them to fire workers with ease because we’ve so weakened our labor laws that workers find it almost impossible to form unions and have any negotiating power with their bosses and (c) we continue to give businesses tax breaks for mergers and consolidations that create multinational super businesses that have no loyalty to the country  (Jeff Immelt said as much in the previous night’s NewsHour broadcast).


**The report lists the findings as follows:

1. U.S. Jobs Lost Rather Than Gained; 2. Research and Development Expenditures Did Not Accelerate;  3. Stock Repurchases Increased After Repatriation; 4. Executive Compensation Increased After Repatriation; 5. Only A Narrow Sector of Multinationals Benefited; 6. Most Repatriated Funds Flowed from Tax Havens; 7. Offshore Funds Increased After 2004 Repatriation; 8. More than $2 Trillion in Cash Assets Now Held by U.S. Corporations ; 9. Repatriation is a Failed Tax Policy

originally published at ataxingmatter

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GAO Report on Corporate Tax Liabilities

A new GAO report [PDF] has made some news by reporting that large fractions of both U.S.-controlled and foreign-controlled corporations report no liabilities under the federal corporate income tax. In 2005, 25% of “large” U.S.-controlled corporations and 67% of all U.S.-controlled corporations reported no tax liability; foreign-controlled corporations reported no tax liability at roughly similar rates (slightly higher overall for GAO’s study period).

There can be good reasons for this — some corporations, e.g. startups, may not even manage to earn a gross profit in some periods, and many others may (and do) fail to earn net profits after common deductible expenses such as salaries, depreciation, and interest expenses.

Since the headline results may nevertheless be incendiary, there’s been a fair amount of commentary providing bad reasons why the GAO’s findings might not be problematic. One non-explanation concerns “S” corporations, where corporate income is passed through to shareholders who then pay taxes on the income through the individual tax system:

An outside tax expert, Chris Edwards of the libertarian Cato Institute in Washington, said increasing numbers of limited liability corporations and so-called “S” corporations pay taxes under individual tax codes.

“Half of all business income in the United States now ends up going through the individual tax code,” Edwards said.

The GAO study did not investigate why corporations weren’t paying federal income taxes or corporate taxes and it did not identify any corporations by name. It said companies may escape paying such taxes due to operating losses or because of tax credits. [Via.]

The GAO’s analysis encompasses “S”-corp returns, which not surprisingly rarely show corporate tax liabilities, but the headline figures are for corporations filing returns for non-pass-through corporate forms. (Nor are pass-through forms inherently non-problematic. As David Cay Johnston reported in Perfectly Legal, audit rates for “S”-corps are low, and had been reduced amid the 1990s War on Tax Enforcement; there are ways of turning income into corporate expenses among other things especially when the IRS isn’t looking too closely.)

Another bad explanation in reasonable clothing comes from the a Tax Foundation economist quoted by the NYT:

Joshua Barro, a staff economist at the Tax Foundation, a conservative research group, said that… [t]he vast majority of the large corporations that did not pay taxes had net losses… and thus no income on which to pay taxes. “The notion that there is a large pool of untaxed corporate profits is incorrect.”

The general point that corporations need to have taxable net income to be subject to income tax is correct enough, but not all corporations without taxable income arrive there the same way. Transfer pricing abuse (paying inflated or deflated prices to related entities for tax avoidance purposes) is a widely acknowledged problem that GAO explicitly did not address in its analysis. The extent of the problem would not only encompass firms who eliminated their taxable income through transfer pricing abuse, but also firms seeking “merely” to shave off the tops of their reported income. The amount of untaxed corporate profits also depends on the actual, and seemingly considerable, extent of abusive tax-sheltering practices — also beyond the GAO report’s scope.

What’s most grabbing about the report is that for corporations reporting positive gross income but zero taxable income, an opaque “other deductions” line is the most common one where zero taxable income is established — about 30% across the board of firm sizes and ownership types (the next “culprits” are non-officer employee compensation and interest payments). That line is below the deductions for rank-and-file wages and salaries, officer compensation, rent, interest, depreciation, and many other common deductible expense items. So you might take that as a measure of the extent of esoteric tax preferences, loopholes, and other income-avoidance methods in the corporate tax code or maybe otherwise. It does not obviously help make the case for a healthy corporate tax system.

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Where are the Household Entrepreneurs?

Glancing through the CBO survey that only checked one side of the ledger, and therefore made Greg Mankiw happy, I came across the data on Corporate Taxes paid, by Quintile of Income.

Now, there has been a groundswell of declarations that people aren’t “leaving the job market”; instead, they are supposedly being “entrepreneurs,” starting their own businesses voluntarily (as opposed to because firms won’t contract with an individual), and reaping the benefits of the ownership society. This was the alleged basis for preferring the smaller, more subject to “population control” changes household survey to the payroll survey when measuring unemployment. (See here for a sample discussion.)

As noted in the sample discussion, the household survey doesn’t jibe with Social Security payments. So we are left with the possibility that the income of those entrepreneurs is being maintained at their corporate level, for some reason.*

Which should mean that Corporate Tax payments, as a percentage of all corporate tax payments, would have also risen among the “new entrepreneurs.”

Source: CBO, Table 1B. As usual, select the graphic to enlarge it.

It doesn’t look that way. I can’t find a single level of earnings that isn’t down at least 25% over the past ten years—and that’s the lowest quintile of earnings, not exactly the type of people you hear about being “success stories.”

So if you really think there are a lot of new S-corps out there, it appears that they’re either (1) in the group averaging more than $231,300 a year in income (see Table 1A), or (2) so poor that their tax bills are falling behind those paid by everyone else, and they’re clearly being irrational having a corporation in the first place.

Unless I’m missing something. If so, what?

*Since the highest marginal tax rate for individuals equals the corporate tax rate, that reason (especially for them levels, most of whom would not pay a marginal rate of 35%) is unlikely to be tax-related, except possibly as a matter of timing payments, which would not significantly alter a long-term trend.

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The Cactus Tax Proposal, Part 3: Corporate Tax Rates

‘d like to give my thoughts on corporate income taxes. A favorite idea on the right is that taxes on corporations should be eliminated. The reasoning is this: because the corporation pays taxes on income when it makes a profit, and the shareholders pay taxes on that income once it is distributed to them, essentially we have double taxation. In this post, I am going to argue that tax rates on corporations should at a minimum be kept where they are, if not raised. My arguments are based on fairness and the concept of moral hazard.

Taxes are fees for services, the price we pay for a civilized society, according to Oliver Wendell Holmes. These services include access to the physical and social infrastructure of the United States, use of the legal system, and even protection from the Canadian hordes.

humorous pictures
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(I’ve been wanting to use that picture!)

All of these services cost money. Many of them exist for the benefit of corporations and nobody else. For instance, there’s a whole body of law associated with corporations alone – it doesn’t directly affect you or me in any way. And corporations have legal rights separate from their owners. As an extreme example, consider that even if you just purchased 100% of the shares of a company, hostile managers could still have you arrested for trespassing if you show up at HQ before the next shareholder meeting.

So… the corporation is not its shareholders. (Yes, there are some types of corporations that are pass-throughs, but they are treated as such by the tax code anyway.) It has separate needs, and separate rights under the law. It receives services from the government separately. It should pay for those services.

How much? Well, it receives essentially the same services from the government as a person does. Sure, there are differences around the edges. As I noted, there are areas of the law that deal only with corporations, just as there are areas of the law that deal only with people. But when it comes to the big services, the expensive ones – national defense, protection of assets, etc. – the corporations use those services as much, if not more, than the rest of us.

Which means that corporations should pay taxes the way people pay taxes. At the same rates for the same level of income.

And now to the second part of this post, to note that, if anything, shareholders are getting a bargain with this “dual layer of taxation” we keep getting told about. And yes, I own a few shares here and there. I also own a small LLC, and am in negotiations with some partners to form another one. So this is not “class envy” speaking.

What I’ve learned about corporations is simple: there’s nothing that is done inside a corporation that can’t done without corporations. Sure, there are a number of economic theories about the benefits of creating a company dating back long before Ronald Coase’s seminal paper, but there is only one benefit to creating a corporation rather than a company: its the ability to reduce one’s risks. But that reduction of one’s risks is not a true reduction – its actually exporting one’s risks onto everyone else and forcing them to share in those risks.

Think of it this way: if you engage in whatever line of business, you assume any and all liabilities for that. If you can find someone to loan you $100 million to buy mortgage backed securities on a leveraged basis, and home prices collapse, you now find yourself owing well more than $100 million. On the other hand, if you buy shares of a corporation that has found someone to loan it $100 million to buy mortgage backed securities leveraged to the hilt, your maximum possible losses equal the amount you spent on buying those shares. What happens to the extra few hundred million in losses? They don’t just go away – they are absorbed by society. Society pays for those losses.

That ability, that right to export your liabilities onto society, onto everyone else, clearly has a tremendous value to individuals, and as a result, it should have a cost associated with it. That cost should also be very, very high to reduce the moral hazard associated with such behavior.

As we saw with the Bear Stearns, to name one recent a recent example, clearly the price being paid is not high enough to prevent a moral hazard when you’re dealing with the unscrupulous and the kool-aid drinkers. After all, it turns out that corporations also have other benefit over flesh and bone human beings – if a corporation gets big enough, the government and the Fed seem to feel that the shareholders shouldn’t even risk losing the entire amount they invested in the company, much less assume the negative value associated with those investments.

Eliminating the corporate income tax would not only be unfair, given the services corporations consume, it would also make moral hazard much, much more likely and much, much more common.

Previous installments to the Cactus Tax Proposal:
Part 1: What Matters More than Anything Else
Part 2: Charities

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