How do major U.S. corporations avoid paying taxes? Blame Congress.

Loophole Land: Time to Reform Corporate Taxes

By David Callahan
Ourfiscalsecurity.org

Many Americans were appalled when it was revealed recently that General Electric would pay no taxes for 2010, despite U.S. profits of over $5 billion.

But I doubt that there is a single top tax attorney or chief financial officer in the country who was all that surprised. You see, these people are denizens of Loophole Land – a very different place than W-2ville where most Americans live.

In Loophole Land, nothing is quite as it seems. Yes, there is a top corporate tax rate of 35 percent, but it is well understood that nobody actually pays that. On the contrary, many companies pay nothing at all. [Emphasis ours.]

How can this be?

For starters, Loophole Land has no national borders and so it is easy to shift money around in ways that avoid taxes. General Electric works all over the world, and under tax law, it isn’t taxed on its foreign profits as long as it says that it is reinvesting those profits abroad. Many companies become expert at shifting profits abroad to foreign subsidiaries in low-tax or no-tax nations. In 2008, Goldman Sachs, had 29 subsidiaries located in offshore tax havens and reported profits of over $2 billion. It paid federal taxes of just $14 million on those profits.

Loophole Land is also a place where past business losses are never, ever forgotten. So, for instance, if you run a giant conglomerate with a profit-hungry credit division that makes a lot of stupid loans to people who can’t pay them back, fear not: you’ll be able to write off those losses – in effect getting ordinary taxpayers to subsidize your gambling debts. General Electric is widely seen as a manufacturing company. But up to half of its profits during the Bush years came from its large consumer lending business, GE Capital, and that business suffered huge losses during the crash – reportedly $32 billion. Now we are all helping GE foot the bill for that unlucky streak.

(Continued here with charts.)

Finally overcoming the fear of being labeled 'liberal', the media begin to report the truth on taxes

Super rich see federal taxes drop dramatically

(AP) – 13 hours ago

WASHINGTON (AP) — Still scrambling to file your taxes? You'll probably take little consolation in hearing that the super rich pay a lot less taxes than they did a couple of decades ago. And nearly half of U.S. households pay no income taxes at all.

The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17 percent, down from 26 percent in 1992.

Over the same period, the average federal income tax rate for all taxpayers declined to 9.3 percent from 9.9 percent.

The top income tax rate is 35 percent, so how can people who make so much pay so little in taxes? The nation's tax laws are packed with breaks for people at every income level. There are breaks for having children, paying a mortgage, going to college, and even for paying other taxes. Plus, the top rate on capital gains is only 15 percent.

There are so many breaks that 45 percent of U.S. households will pay no federal income tax for 2010, according to estimates by the Tax Policy Center, a Washington think tank.

(Continued here. See also "Super rich see federal taxes drop dramatically" from Salon.)

Don't like taxes? Try living in the Congo

“Taxes are the price we pay for a civilized society.” — Oliver Wendell Holmes, Jr., Associate Justice, U.S. Supreme Court, 1902-1932

It’s April 15: How about a tax party?

By Nancy Larson Shapiro
Mankato Free Press

Nancy Larson Shapiro is an educator who directed Teachers & Writers Collaborative, a nonprofit in New York City for 30 years.

Having recently returned from a trip to West Africa, I am dismayed by the scenes of “tea partiers” railing against our government, sometimes with distressingly disrespectful signs and language, directed particularly at President Obama.

As I listen to their complaints, I think back to the days in the 1950’s and 60’s when I grew up in Mankato, Minnesota.

My mother raised three children with government support — the aid to dependent children she received after my father died of injuries suffered in World War II. My friends and I received excellent educations at Lincoln Elementary and Junior High and — the then only — Mankato High School, where we could also participate in sports and vocational and arts activities.

I recall a relative who was on the school board when the high school was built saying that the board consciously built a state-of-the-art facility for the baby boomers coming along (thank you!). Not only was the viola I played in the school orchestra provided by the school for free, the whole school experience was free — well, not really “free” of course (more about taxes later), but there were no fees to attend — as there are in many African countries, meaning that the poor remain uneducated.

Our education in Mankato continued in an array of community programs provided by nonprofit institutions — whose tax-exempt status helped keep them viable, providing a critical link between the private and public sectors — like the YMCA, clubs and churches. I left Mankato to attend Minnesota’s world-renowned public, land grant University of Minnesota, where the tuition was very reasonable.

These memories bring me back to today’s anti-government protesters, who seem to think they can handle their own and the country’s needs individually and who clamor against taxes, claiming our government does nothing for us. For them, I would suggest a trip to the Republic of Congo. Money is not the problem in the Congo, which collects millions of dollars a day from oil companies paying for drilling rights. Very little of that money, however, goes to build infrastructure or to benefit the people, while the country’s president is one of the largest landowners in France.

In the Congo I walked on the dirt streets — only a few roads are paved — or drank my bottled water — most people have no running water; they must wait for a truck carrying potable water — or watched the glow of kerosene lamps — most people have no electricity — or stared at the garbage piled high or burning beside the road, or talked with a man who had been jailed for trying to expose the corruption in the country.

I began composing a mental list of what we take for granted in the U.S.

We turn on a faucet for drinkable water; we can travel all over this vast country on excellent highways; we have good public schools in most communities; we have sewer systems and trash collection and disposal; we have public libraries; we have philanthropic organizations that provide myriad free programs.

We have an almost infallible electrical grid that provides electricity to almost everyone; we have the most up-to-date technological capacity to run millions of cell phones and computers; we have bridges, tunnels, subways, buses, trains, planes that provide efficient and often low-cost transportation; we have local parks and playgrounds; we have a vast national park system that preserves the planet’s natural wonders; we have a Constitution that protects our rights, including the freedom to protest against our own government; we have the security provided by civilian and military law enforcement. And, yes, we have government programs to help the poor, such as food stamps and school lunches, to aid special groups such as returning war veterans, and to assist just about everybody such as Social Security, Medicare, and, perhaps now, health care.

Warren Buffet points out that American businesses owe much of their success simply to being located in this highly functioning country.

While no one relishes paying taxes, it may help to keep some of the returns we get for our tax investments in mind.

Oliver Wendell Holmes, Jr. — who willed his estate to the U.S. government — said, “Taxes are the price we pay for a civilized society” — the saying now atop the Internal Revenue Service building.

I say that true patriotism begins with respect, with a recognition of the vital role a responsible government plays in all our lives and with a willingness to pay our fair share.

TO: Our next President and Congress

FROM: Leigh Pomeroy

RE: Okay, so you've been elected. Here is what you've got to do.

Now that we have endured a long, mostly pointless and sometimes nauseating campaign season mostly devoid of any discussion of the important issues, it is time to confront those issues and ask ourselves quite seriously, "That the hell are we going to do about the world's future?"

Notice I didn't say "about America's future." The reason is simple: The future of the U.S. and indeed every country is inextricably bound up with the future of every other country. In an increasingly smaller world, no longer can one country act in a certain way and have little or no effect on any other country.

National boundaries are now dissolving at a rapid place, despite even the misguided and ultimately futile erection of walls between one people and another as we are seeing in Palestine and on the U.S. and Mexican border.

People flow like water to the most promising spot, and artificial boundaries can only temporarily deter the laws of physics and survival. This is also true of capital, goods and services on the positive side, and pollution, warfare and anarchy on the negative.

Thus, national boundaries are only artificial lines drawn on the globe, and even geographical boundaries are becoming less important as the planet shrinks due to global communications and transportation.

This said, what will follow in a short series of essays is just a small list of some problems and solutions that the new U.S. President and Congress must face and should consider, if not adopt, in the next four years.

Restructuring Tax Law

While tax law is not the most important of the boogeymen waiting inside the closets of the White House and Capitol, it is certainly one that should be dealt with before it gets completely uncontrollable. The problems inherent in the current tax laws are beyond just tweaking. We've tried that, and while sometimes such adjustments can lead to short-term solutions, inevitably the tax code is still beset with long-term problems that only create larger problems.

There is only one solution, and that is we must restructure U.S. tax law.

Optimally, we should replace the income tax with a carbon or pollution tax. It makes a lot more sense to tax what is bad for society and survival (pollution and carbon), not what is good (income). A carbon and/or pollution tax has been proposed by many futurists and thinkers, among them most prominently Lester Brown, Greg Mankiw and 255 top Canadian economists.

In the absence of going this far, in the very least the tax system must be simplified. The greater the complexity of a system, the more time and effort is spent to administer it and the greater the chance there is for inaccuracies and fraud to creep in. In other words, as a system becomes more complex it also becomes less efficient. In some cases, some systems become so complex that their costs exceed their yield.

While the U.S. income tax system has not reached this point yet, it is becoming less efficient each year. It is time to reverse this trend.

Numerous proposals have been offered, two primary ones being the so-called flat tax and a national sales tax to replace the income tax. The flat tax attempts reach the goal of simplification not because of its everyone-should-pay-the-same-rate advocacy but because it proposes to eliminate most deductions. Adding graduation to a tax system only adds a small dollop of complexity.

The national sales tax is worth considering because it takes the onus of taxation off income (earning money is good) and puts it on consumption (both good and bad, depending on what is being purchased). The big drawbacks to the national sales tax are that no other country is using it, and such a system would be difficult to enforce. In the global economy, no country can adopt financial systems, be they taxation or accounting or financial, that is vastly different from the worldwide norm without adversely affecting its own economic well-being or that of other countries. A case in point is the offshore tax havens in the Caribbean, which adversely affect tax collections in the U.S. and Europe.

A national sales tax would be difficult to enforce as barter would become increasingly attractive, replacing the exchange of money for goods and services. And it's very difficult to tax barter, as we already know.

A False Issue: Lowering the Capital Gains Tax

We have heard the constant call to lower of the capital gains tax as a means for encouraging investment, thus fueling the economy and making life better for everyone. Balderdash. The only reason for raising or lowering the capital gains tax is to bring it into equilibrium with the prevailing norm in the world.

To repeat: Money flows like water. It is going to go to the most advantageous spot, regardless of national boundaries or laws. If all investments yielded the same return around the planet, capital would naturally go to the country where taxes are lowest. But if investments yielded, say, a 30 percent higher return in country A than in country B, and country A had a 20 percent higher capital gains tax than country B, then investors would still choose an investment in country A over country B despite its higher capital gains tax.

Earned income (wages and salaries) should never be taxed at a higher rate than capital gains. To do so only discourages labor and productivity.

And while we're on it, let's stop making the IRS the scapegoat for the nation's tax ills. The IRS simply carries out the law. It's Congress that writes the law and the President who signs it into being. If the tax law sucks, don't allow the IRS to be blamed. Instead, look into a mirror.

[To be continued: Replacing the GDP, finding a permanent health care solution, revamping political campaigns, investing in real "defense", and coming to grips with the mega-challenge — energy, environment, food, water and land.]

Towards fair taxation

An Unjustified Privilege

by Paul Krugman, Commentary, NY Times:

During the 2000 presidential campaign, Ralph Nader mocked politicians of both parties as “Republicrats,” equally subservient to corporations and the wealthy. It was nonsense, of course: the modern G.O.P. is so devoted to the cause of making the rich richer that it makes even the most business-friendly Democrats look like F.D.R.

But right now, as I watch Senate Democrats waffle over what should be a clear issue of justice and sound tax policy..., I’m starting to feel that Mr. Nader wasn’t all wrong.

What’s at stake here is a proposal by House Democrats to tax “carried interest” as regular income. This would close a tax loophole that ... basically lets fund managers take a large part of the fees they earn ... and redefine those fees, for tax purposes, as capital gains.

The effect of this redefinition is that income that should be considered ... ordinary income taxed at a 35 percent rate is treated as capital gains, taxed at only 15 percent instead. So fund managers get to pay a low tax rate that is supposed to provide incentives to risk-taking investors, even though they aren’t investors and they aren’t taking risks.

(The rest is here.)

Now here's an idea: Simplify the income tax

While we dwell on too many little issues, the big issues go languishing. One real way that American taxpayers can save money is to create more efficient institutions.

Inefficiency in the guise of high administrative costs is one of the two big bugaboos in healthcare — the other being the astronomical amount of resources put into end-of-life medical care. (No, folks, the costs associated with malpractice don't even come close to these two.)

The other way Americans can save gobs of their hard-earned dollars is to simplify the tax structure. Recently in Newsweek, George Will, long the archconservative, praises a plan put forward by Oregon Sen. Ron Wyden — a Democrat, no less.

I agree with both of them. — LP

Sisyphus in the Senate

By George F. Will, Newsweek

July 16, 2007 issue - Sen. Ron Wyden, the Oregon Democrat, has not received the memo explaining that Congress can accomplish nothing in an election year or the year before one. He calls himself the Senate's designated driver, the one not running for president, so he has time to try legislating. He also is the Senate's Sisyphus, determined to roll the boulder of tax reform up Capitol Hill yet again.

The fact that Wyden's proposal, the Fair Flat Tax Act, seems radical is a measure of how foolishness has become conventional. Today, as when tax reform was accomplished in 1986, the objectives are threefold—although Wyden stresses only two.

One is simplification for its own sake. Americans spend an estimated 6.4 billion hours (more than the 6.3 million industrious people of Indiana work in a year) and more than $265 billion on compliance with a tax code that is six times longer than "War and Peace" (not counting 8 million words—20,000 pages—of regulations). And even with professional help, Americans cannot be confident that they have not broken the law concerning this basic civic duty.

The rest is here.