The Corporate Tax-Dodge Code

Between 2002 and 2011, Boeing reported to its investors that it earned $31.8 billion. But it reported something entirely different to the IRS and didn’t pay income taxes. Instead, it received tax benefits of $2.06 billion, an effective tax rate of -6.5% (CTJ fact sheet). Other companies were similarly agile. Bailed-out GE earned $10.5 billion, paid zero taxes, and received $4.7 billion in tax benefits. Of 280 companies that the CTJ researched (report), 30 paid no federal income taxes from 2008-2010. They were all using loopholes, subsidies, and offshore strategies to do what the tax code encouraged them to do: dodge taxes.

So now, Treasury Secretary Timothy Geithner is trying to put some fresh lipstick on the tax code: lower the top rate from 35% to 28%, close loopholes, cut subsidies, and make offshore profit-shifting strategies more difficult. Then, in the same breath, he proposed new loopholes and subsidies—but for different constituencies, such as manufacturers…. Oh wait. Aren’t Boeing and GE manufacturers? But they’re already not paying taxes. So hand them even more tax benefits?

Why yes. GE CEO Jeffrey Immelt heads President Obama’s Council on Jobs and Competitiveness. And taxpayer subsidies make GE more competitive. Same with Boeing. In that respect, the White House released a paper, Investing in America: Building an Economy That Lasts, intended for Immelt’s CEO colleagues not the Democratic rank and file. It outlines policies to make America competitive with low-wage countries like China and points at an accomplishment: dropping real wages in the US.

On the Republican side, there has been a garden variety of tax-cut proposals, the latest from Mitt Romney. They also address some of the symptoms of what’s wrong with the tax code. But none address its most fundamental flaw. A flaw that produces the absurdity where some highly profitable companies pay no taxes while others pay them out their nose: diametrically opposed accounting systems for reporting to investors and to the IRS.

GAAP, our glorious body of accounting principles, allows companies in a myriad ways to inflate profits and incentivizes them to engage in economically unproductive activities to make their numbers look better. Goal: maximize reported income.
The corporate tax code does the opposite. It encourages the very same companies that reported inflated incomes to their investors to report little or no income to the IRS. It incentivizes companies to invest in economically unproductive activities, such as lobbying or shifting income offshore. Goal: minimize taxable income.

Rather than toying with percentages and loopholes in the corporate tax code, Congress needs to throw it out and replace it with GAAP. Tax accounting and financial accounting would become the same. This would have highly beneficial consequences. Among them:

  • Tax rates could be much lower because the income they’re applied to is the same inflated income that investors get dished up on a quarterly basis. Rates could be low enough to incentivize companies to keep profits onshore.
  • Companies could choose: inflate profits to look good to investors but pay more in taxes; or report conservative numbers and pay less in taxes. Unintended consequence: financial reporting might become more reliable.
  • Companies would have some certainty about income taxes and could commit to long-term investments with less risk.
  • IRS auditors would do tax audits based on GAAP.

So if Boeing reported $5.1 billion in profit to its investors, as it did for 2011, it wouldn’t get a tax benefit of $635 million, as it did, but would instead pay income taxes at a low rate on the $5.1 billion. And companies that are now paying taxes at extravagant rates would pay less. It would bring a measure of fairness to corporate taxes.

Alas, that ugly corporate tax code is the congressional bread and butter—a tool with which lawmakers extract campaign contributions and other goodies from their corporate sponsors.

Profitable tax dodgers would dig in their heels. Companies that would see their tax bills fall might jump into the fray in support. Lobbyists on both sides would raise a ruckus. The noise level would blow out our national eardrums. Even President Obama, the populist yes-we-can campaigner, is financially dependent on the corporate elite and has to please them. With that in mind, he came to San Francisco for some epic fundraisers.

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