Two Thirds of US Companies Paid NO Federal Income Taxes

[NorthSideSox72]

Via various rules and loopholes, two thirds of all US companies are not paying any federal income tax.

 

Good? Bad? Some of both? Unfair to individuals? Unfair to some companies? Restructure of tax code needed?

 

[Texsox]

We can encourage companies to do the right thing with deductions (if you are for them) loopholes (if you are against).

 

For example by investing in alternative energy sources an incentive to the company to save on taxes is good for the US. Receiving a tax incentive to build a factory in a certain area or perhaps a baseball stadium can be good for us as well.

 

Another way, is venue shopping. Showing a greater profit in a foreign country. Here is an example for those unfamiliar. Company A owns a factory in Mexico. The Mexico manufacturing company builds a product with their cost of $2.00 and sells the finished goods to the US distribution company. The US arm in turn sells 1,000,000 units to WalMart at $3.00. Here is were the game is played. They could transfer the item at $2 and show no profit in Mexico. They could transfer it at $3 and show no profit in the US. Both processes catch the ire of the respective governments. Using this to avoid paying US taxes is bad for us.

 

So as always there is no clear cut answer. Overall, their employees generally pay taxes, receive wages, and contribute in that way. I've read some well opinioned articles that business should never pay any sort of tax.

[Balta1701]

We can encourage companies to do the right thing with deductions (if you are for them) loopholes (if you are against).

 

For example by investing in alternative energy sources an incentive to the company to save on taxes is good for the US. Receiving a tax incentive to build a factory in a certain area or perhaps a baseball stadium can be good for us as well.

 

Another way, is venue shopping. Showing a greater profit in a foreign country. Here is an example for those unfamiliar. Company A owns a factory in Mexico. The Mexico manufacturing company builds a product with their cost of $2.00 and sells the finished goods to the US distribution company. The US arm in turn sells 1,000,000 units to WalMart at $3.00. Here is were the game is played. They could transfer the item at $2 and show no profit in Mexico. They could transfer it at $3 and show no profit in the US. Both processes catch the ire of the respective governments. Using this to avoid paying US taxes is bad for us.

 

So as always there is no clear cut answer. Overall, their employees generally pay taxes, receive wages, and contribute in that way. I've read some well opinioned articles that business should never pay any sort of tax.

Here's a counter-point though. In 2003, a major point was made over double-taxation of business earnings. Specifically...the businesses had to pay taxes on the profits they made, and then they had to pay taxes on the money again depending on how it was spent. The phrase "Double-taxation" was a rallying cry of the 2003 deficit increasing bundle that we passed, which reduced the income tax rate on corporate dividends paid out to the same rate that is currently paid on capital gains.

 

If 2/3 of companies in the country are paying no taxes on their revenue thanks to various accounting measures, and the tax rate on dividends is 5%, then this is a gargantuan handout to the largest investors who hold stock in companies that pay large dividends. In most years, they earn a big chunk of money, pay little to no taxes or if they're a lucky ducky company who has good lobbyists the government pays them a few hundred million dollars, they then pass those profits out through dividends, and the only point at which the money is taxed is a 5% tax on the dividends, whereas if you're an employee working 80 hours a week for that company you're paying 15, 20, 25% or something like that.

[kapkomet]

I'm an expert in this area (I'm no tax attorney... but let's just said I'm pretty damn versed in transfer pricing now, thanks to where I work).

 

I was wondering if someone was going to post this. I saw the article this morning, and in that same article, it said "companies need to pay their fair share". Blah. Of course, though, I work for a wholly owned subsidiary of two very large non US MNE's.

[StrangeSox]

What about the line of thought that goes "companies don't really pay any taxes, they just collect them from their customers and pass them on to Uncle Sam"?

[Texsox]

What about the line of thought that goes "companies don't really pay any taxes, they just collect them from their customers and pass them on to Uncle Sam"?

 

That is an excellent thought, and correct in a lot of examples. But if one company can avoid paying the taxes and their competitor is paying, that gives them an advantage. I believe you have to look at the types of taxes. For example a .90 per pack cigarette tax effects every company the same. Property taxes is variable and does not have the same effect on every company.

[Balta1701]

What about the line of thought that goes "companies don't really pay any taxes, they just collect them from their customers and pass them on to Uncle Sam"?

Let's hypothesize that I own a couple million dollars in stock for a company that pays a large dividend, like GE, or Exxon. Let's say I'm pulling in enough in dividends to make oh, $40,000 or so per year. Let's also assume that the company is one of those companies paying virtually nothing in income taxes or getting even a few billion in subsidies from the government.

 

I sit back and pay 5% taxes on those dividends. The company pays no tax on their earnings. The people purchasing those products have to pay taxes on the products they purchase, but they also have to pay taxes on their income.

 

Compare that to a person with a normal job, working 40+ hours a week. They're paying what rate on taxes? 15-30% give or take their exact income.

 

So my question is, if a company is paying virtually nothing on taxes, why should the person owning stock in that company also be paying 5% taxes on their dividend income?

 

This is just another example of how, under the banner of "Tax cuts stimulate the economy always and pay for themselves always" the wealthiest of the wealthy, the investor class, who are able to afford their own lobbyists, have structured the tax code to the disadvantage of people who are actually working. Enough things are deductible that it allows companies to maximize their income over a quarter and pay that out to its shareholders, keeping the stock price high and keeping the people who own a lot of stocks raking in the money. But, the more average person, the person who can't afford his or her own private lobbyist, gets forced to pay a much higher rate of taxation because he or she can't pay someone to write the loopholes in to the laws.

 

Give you another example. Hedge fund managers, some of the guys who helped build this disastrous mortgage bubble, get taxed at a dramatically lower rate than you or I on the income they earn just because there's a loophole built in to the tax scheme for them. And every time there's an effort to close it, there's an uproar in Congress about how we can't afford to increase taxes when either the economy is growing or when the economy isn't growing (take your pick).

[Texsox]

Broad stroke comment. In nature a "company" doesn't exist. It does not eat, sleep, drink, crap, or reproduce. A nation is made up of people, not "companies". Why don't we actually tax people and not things?

 

Another thought we cut taxes on people so they can stimulate the economy by buying more products from companies that will not be paying taxes?

[lostfan]

Broad stroke comment. In nature a "company" doesn't exist. It does not eat, sleep, drink, crap, or reproduce. A nation is made up of people, not "companies". Why don't we actually tax people and not things?

A corporation (not company) is recognized as its own entity that pays taxes so the individuals running it are protected from liability, the corporation assumes all the liability (that's a quick, down and dirty definition)

[Texsox]

A corporation (not company) is recognized as its own entity that pays taxes so the individuals running it are protected from liability, the corporation assumes all the liability (that's a quick, down and dirty definition)

Which is why I prefaced this with "in nature". A corporation is a legal entity, not a natural one.

[kapkomet]

/sits back and eats some popcorn.

 

 

/carry on

 

[southsider2k5]

Let's hypothesize that I own a couple million dollars in stock for a company that pays a large dividend, like GE, or Exxon. Let's say I'm pulling in enough in dividends to make oh, $40,000 or so per year. Let's also assume that the company is one of those companies paying virtually nothing in income taxes or getting even a few billion in subsidies from the government.

 

I sit back and pay 5% taxes on those dividends. The company pays no tax on their earnings. The people purchasing those products have to pay taxes on the products they purchase, but they also have to pay taxes on their income.

 

Compare that to a person with a normal job, working 40+ hours a week. They're paying what rate on taxes? 15-30% give or take their exact income.

 

So my question is, if a company is paying virtually nothing on taxes, why should the person owning stock in that company also be paying 5% taxes on their dividend income?

 

This is just another example of how, under the banner of "Tax cuts stimulate the economy always and pay for themselves always" the wealthiest of the wealthy, the investor class, who are able to afford their own lobbyists, have structured the tax code to the disadvantage of people who are actually working. Enough things are deductible that it allows companies to maximize their income over a quarter and pay that out to its shareholders, keeping the stock price high and keeping the people who own a lot of stocks raking in the money. But, the more average person, the person who can't afford his or her own private lobbyist, gets forced to pay a much higher rate of taxation because he or she can't pay someone to write the loopholes in to the laws.

 

Give you another example. Hedge fund managers, some of the guys who helped build this disastrous mortgage bubble, get taxed at a dramatically lower rate than you or I on the income they earn just because there's a loophole built in to the tax scheme for them. And every time there's an effort to close it, there's an uproar in Congress about how we can't afford to increase taxes when either the economy is growing or when the economy isn't growing (take your pick).

 

How much income tax do you think GE or Exxon is generating in employee income taxes? What is that worth to the American economy? You know as well as I do that companies will protect their profits first and foremost. If their taxes start getting hit, they are going to look to cut costs, and the biggest cost to a company is always its employees. Companies are already fleeing overseas to avoid paying corporate taxes, and they are also refusing to list their stock here for trading because of Sarbines Oxley's costs.

 

This is my biggest pet peeve about the Barrack Obama and the Democratic movement in general. I do not believe that success should be penalized. You can not support a country by taking from what works, and giving to that which doesn't. Every single experienment in this kind of economy has been an abject failure if tried on any type of scale because it quashes motivation and effort.

 

Looking specifically at an Exxon, envision this for a second. Obama is elected President and enacts the windfall profits tax. Exxon now has no motivation what-so-ever to find more oil and petroleum based products to sell, because the Congress in its infinate wisdom found an arbitrary number and penalized the company for going over that. Eventually XOM is going to quit looking for ways to earn profits, because there is no reason to earn them if you give them all back. They will quit looking for oil, expanding and repairing refinaries, looking for alternative fuels etc. Instead of bringing the price of gasoline down, it will have the opposite effect and make it skyrocket in the long term. I'd even be willing to bet that they would be willing to sit on supply enough to bring demand down so that it hits the optimimum pricing curve right at where the windfall profits tax starts. It would be an unmitigated disaster to the US economy.

 

Cranking up the corporate taxes on companies will have the same net effect. You start cutting into profit margins, and you start getting people fired. Look no further than the airline industry right now. The price of gasoline is their defacto tax. It has exploded over the last few years, and look what has happened to them. Tens of thousands of people have been fired. Flights have been junked. Planes have been parked. Service is worse than it has ever been. They can afford to do anything different.

 

Look at Ford and GM's cost models versus Toyota and Honda. Their R&D has been non-existant because they have been saddled with the ginormus legacy costs of health care and pensions, not to mention wages that are WAY higher than their Japanese competion. Now they are stuck behind and firing tens of thousands of people as well.

 

Basically what it comes down to is all of the calls for taking money from people have a direct human effect that is easy to ignore when things get turned into an us versus them class warfare election, just like this one is getting turned into again. If you actually stop and examine some of the real word effects of these ideas, they aren't nearly as bright as they seem on the chalkboard.

[lostfan]

The thing about windfall profits tax that makes it dumb is the fact that CRUDE is what's higher, and the oil companies have to pay that higher price. So there is no windfall profit to tax, although it seems like it. If anybody needs to pay a windfall profits tax it's Saudi Arabia, Iran, Venezuela, Nigeria etc.

[Texsox]

The point I was starting at is thus. The closer we get to one tax per person, the simpler things are. As it is now, we pay income tax, sales tax, property tax, tolls on roads, sin taxes, etc. etc. then we start creating things (corporations) so we can tax them too. Taxing a corporation is basically grouping us up to pay another tax.

 

I use to believe the fairest way hypothetically to fund the government is to divide the cost like a restaurant bill. Here's the cost divided evenly between everyone between 25 and 75 years of age. But I now realize that the poorest taxpayers would be paying a much higher percentage of their income then someone with more resources. I also realize if we tried to have everyone pay the same price, and it was based off the poorest person, we would not be building an America we would enjoy living in. So the garduated income tax program is the fairest that provides an America we want to live in with world class roads, military, etc. But wouldn't it be grand if we could stop there? No other taxes.

 

Sorry Kap, perhaps not as wacky as you were hoping

[Texsox]

SS are you suggesting that American auto workers are too well paid and have too generous benefits packages? That to be competitive on a gloabl scale Americans must deal with lower wages and less benefits? You'll never get elected

[southsider2k5]

I would never get elected President because I am not afraid of how the world works. There are counter-arguements out there, but I believe the current and historical results speak to what would portend the future.

[Texsox]

I would never get elected President because I am not afraid of how the world works. There are counter-arguements out there, but I believe the current and historical results speak to what would portend the future.

 

Do you see ana cross the board drop in wages and benefits, or will it be stratisfied? I keep thinking we're going to see a "coming to the middle".

[kapkomet]

/grabs another bowl of popcorn. I'm getting full, and this is getting good.

 

/carry on

 

 

[Texsox]

OMG it's accounting porn for Kap

 

I do not think there is enough fuel for this to get really good.

[kapkomet]

Of course, being the pro-business person that I am, sees it about like SS does. At its root, people make up companies, and if they aren't making enough money, they will cut the people.

 

Corporate taxes are in a sense a double tax, because the same money that they make is taxed again, somewhere in the chain, be it investments, individuals, whatever. So, that's why I'm a proponent of lower corporate taxes. You talk about "supply side" economics - forget individuals - corporate taxation is a lot more bang for the buck.

 

Anyway, I'll chime back in later after I see some more.

[StrangeSox]

The point I was starting at is thus. The closer we get to one tax per person, the simpler things are. As it is now, we pay income tax, sales tax, property tax, tolls on roads, sin taxes, etc. etc. then we start creating things (corporations) so we can tax them too. Taxing a corporation is basically grouping us up to pay another tax.

 

I use to believe the fairest way hypothetically to fund the government is to divide the cost like a restaurant bill. Here's the cost divided evenly between everyone between 25 and 75 years of age. But I now realize that the poorest taxpayers would be paying a much higher percentage of their income then someone with more resources. I also realize if we tried to have everyone pay the same price, and it was based off the poorest person, we would not be building an America we would enjoy living in. So the garduated income tax program is the fairest that provides an America we want to live in with world class roads, military, etc. But wouldn't it be grand if we could stop there? No other taxes.

 

There's also the idea of the "fair tax."

 

From what I understand of it, its essentially a flat sales tax rate on all items and a certain chunk of income (say first $25k) is exempted because those are 'necessary' costs like food and housing. You'd get that money back in the form of a monthly refund check to cover sales tax on basic needs.

 

http://en.wikipedia.org/wiki/Fair_tax

 

[kapkomet]

There's also the idea of the "fair tax."

 

From what I understand of it, its essentially a flat sales tax rate on all items and a certain chunk of income (say first $25k) is exempted because those are 'necessary' costs like food and housing. You'd get that money back in the form of a monthly refund check to cover sales tax on basic needs.

 

http://en.wikipedia.org/wiki/Fair_tax

R-E-G-R-E-S-S-I-V-E = does not work.

 

[lostfan]

R-E-G-R-E-S-S-I-V-E = does not work.

Actually I can't tell if you're being sarcastic or not here but I agree, I think.

 

The fair tax sounds like a really good idea on paper, but in practice it amounts to raising taxes on most people, and the more money you make, the less of your income gets taxed since rich people don't spend 100% of their income. Hell, I'm not even close to rich, and *I* don't spend 100% of my income.

Edited August 12, 2008 by lostfan

[NorthSideSox72]

Actually I can't tell if you're being sarcastic or not here but I agree, I think.

 

The fair tax sounds like a really good idea on paper, but in practice it amounts to raising taxes on most people, and the more money you make, the less of your income gets taxed since rich people don't spend 100% of their income. Hell, I'm not even close to rich, and *I* don't spend 100% of my income.

I think some of the core ideas of the "Fair Tax" actually make a lot of sense, but, its got some huge flaws too.

 

[lostfan]

I think some of the core ideas of the "Fair Tax" actually make a lot of sense, but, its got some huge flaws too.

In theory. It's got some gaping holes in it though. Plus they talk about setting it at 17% which I just don't think is realistic, especially considering the massive dropoff in revenue from the top.