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July 30, 2010

BY STEVE WAMHOFF
www.ctj.org

More than 40 U.S. senators have voted several times this year to block extensions of programs that -- according to mainstream economists -- are the most effective ways to boost consumer demand and create jobs. This minority of senators filibustered a package of extended unemployment benefits, Medicaid funding for states and other vital measures because it would have increased the budget deficit by more than $100 billion, which these senators claimed was unacceptable. They later stopped action on several smaller jobs bills until the Senate (just barely) approved a pared-down $34 billion extension of unemployment benefits.

Yet almost all of these supposedly anti-deficit senators also want to add about a trillion dollars to the deficit over the next decade by making permanent the Bush tax cuts that benefit the very richest taxpayers. While the relatively small, temporary job measures that these senators blocked would have little or no impact on the long-term budget deficit, making permanent the Bush tax cuts for the rich would drastically increase the deficit and reduce our ability to invest in America's future.

There are three parts to the debate over the Bush tax cuts. The first involves the cuts enacted under President Bush in the federal income tax. Under President Obama's proposal, the 98 percent of taxpayers with adjusted gross income less than $200,000 (or $250,000 for married couples) would retain all of these income tax cuts. That leaves in dispute only whether the richest 2 percent will also continue to enjoy fully these income tax cuts, as congressional Republicans propose.

The second involves the federal tax on the estates of millionaires, which President Bush temporarily repealed. While congressional Republicans want to make this repeal permanent, President Obama would meet Bush halfway by cutting the estate tax in half (compared to what it would be if Congress simply allowed the Bush repeal to expire).

Under Obama's proposal, fewer than half of 1 percent of deaths would result in estate tax liability. This means that the federal estate tax would only affect the very richest families -- whose fortunes could only have been made because of the roads that facilitate commerce, the public education that creates a productive workforce and the stability that government provides and which taxes make possible.

The third part of this debate involves modifications to the Bush tax cuts that were included as part of the economic recovery act enacted last year. These provisions, which modestly expanded the Child Tax Credit and the Earned Income Tax Credit, expire at the end of this year, just like the Bush tax cuts. President Obama would make these provisions permanent, while congressional Republicans would not. The result is that the poorest three-fifths of taxpayers would actually pay more in taxes under the Republican approach than under Obama's plan.

How do Republicans (and conservative Democrats who agree with them) justify their position? One argument they make is that the tax system unfairly burdens the rich and lets the poor off too easily. For example, conservatives have lately fixated on the fact that many people don't owe any federal income taxes. Many cite this fact to explain their opposition to the Earned Income Tax Credit and the Child Tax Credit and their support for more tax cuts for the rich.

But the fact that some people do not owe income taxes is a red herring. Everyone who works pays federal payroll taxes, even if they do not earn enough to owe federal income taxes. Everyone pays state and local taxes, which tend to be very regressive, meaning they eat up a larger fraction of a poor family's budget than a rich family's budget. The progressive aspects of the federal income tax just barely offset the regressive features of all these other taxes.

Conservative lawmakers also like to argue that if the rich lose their tax cuts, the small businesses they own won't be able to grow and create jobs. This is also a red herring. Only 3 percent to 5 percent of taxpayers with business income would lose any of their income tax cuts under Obama's plan. And even for these taxpayers, there is no connection between income tax rates and hiring decisions. Businesses are not taxed on money they pay to their employees as wages, and small business owners are not taxed on income they reinvest in their businesses.

Congressional Republicans want to add a trillion dollars to deficits over the next decade by extending Bush tax cuts for the very rich. At the same time, they claim we can't afford programs and tax breaks to help the economy and working families that cost a tiny fraction of their proposed giveaway to the wealthy. Their approach is both hypocritical and irresponsible.

Steve Wamhoff is the legislative director for Citizens for Tax Justice.

(Original Post)

The Globe and Mail (Canada)

February 4, 2009 Wednesday

Death is Certain. Taxes, Maybe Not

by TU THANH HA

INTERNATIONAL NEWS; Pg. A15

The fiscal foibles of three of Barack Obama's cabinet nominees reflect a broader problem in a country where each year there is an estimated tax gap of $350-billion (U.S.) between what is owed and what is paid to the Internal Revenue Service.

"Are we a nation of tax cheats? Basically no. But the answer is nuanced," said Howard Chernick, a specialist on public-sector economics at Hunter College in New York.

While most Americans are wage earners whose income taxes are deducted at the source, small businesses and independent workers are turning into the biggest source of tax avoidance in the United States, Dr. Chernick said.

The widening income inequality in the United States makes non-wage income more prominent and contributes to tax evasion because non-wage transactions are less visible, a 2003 paper by IRS senior economist Kim Bloomquist says.

"The tax code makes it awfully easy for people who are in business to not pay their taxes as they should. Sometimes it's by confusion, sometimes they think they can get away with it," said Robert McIntyre, director of the Citizens for Tax Justice advocacy group.

The optics were particular bad for former Senate Democratic leader Tom Daschle, who dropped out of contention for the post of health and human services secretary over his failure to pay taxes on the use of a luxury car and driver while working as a consultant.

"We've gotten into a culture in the United States where the acceptance of aggressive tax evasion has grown and I fear that Daschle was subject to that culture," Dr. Chernick said. "It's infected everyone. ... Very few people are immune to the culture of tax avoidance."

Among red-meat Republicans bristling at Mr. Obama's honeymoon, the developments were a source of bons mots.

"One good thing about electing a Democrat as president is that, as he nominates fellow Democrats to senior positions in the executive branch, millions of dollars in unpaid tax liabilities come to light and are belatedly paid," wrote conservative blogger John Hinderaker.

"Liberals don't mind tax rates going up because they're not going to pay anyway," Republican Senator Jim DeMint said on a TV panel.

In fact, both Dr. Chernick and Mr. McIntyre said, IRS enforcement diminished under the Bush presidency and during past Republican-led Congresses.

During that time, U.S. media stories reported how IRS auditors spent less time scrutinizing corporations, investors in real-estate partnerships evaded billions of dollars in taxes each year and the ranks of IRS auditing lawyers were trimmed.

"Any time the government tried to crack down on cheating, the Republicans in particular stood up and said 'You're persecuting small businesses,' " Mr. McIntyre said.

Mr. Bloomquist's IRS paper noted that wealthier Americans had "greater antipathy towards taxation."

The paper even cited as the most notorious example the hotel tycoon Leona Helmsley who famously said that "only the little people pay taxes."

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Monday, July 26, 2010

By Joey Peters, Special to Stateline

Starting late this week and continuing through mid-August, some 16 states will kick off an event that has become a ritual of back-to-school season. They will temporarily suspend sales taxes on pens, pencils, binders and bookbags, as well as moderately-priced clothes, and in some cases, computers.

For Illinois, it will be the first time ever that a sales tax “holiday” has been declared. From August 6 to August 15, shoppers can buy school supplies or clothes and shoes worth up to $100 without paying the 5 percent state sales tax. The move is expected to cost state coffers $60 million, even as Illinois wrestles with a $5 billion backlog of unpaid bills.

On the other hand, in Georgia, where tax breaks on back-to-school products have been a staple since 2002, the Legislature decided to forgo it this year, much to the dismay of retailers. Lawmakers didn’t want to be subsidizing clothes for children to wear to school at a time when they were cutting back spending on the schools themselves.

Sales tax holidays have been around since New York passed the first one 15 years ago. According to the Federation of Tax Administrators, states have found lots of excuses to declare the holidays. Louisiana and South Carolina kick off hunting season with a tax break on guns. Louisiana and Virginia begin hurricane season with a tax break on preparedness items such as flashlights, batteries and generators. And six states, including Maryland, Missouri and West Virginia, offer temporary sales tax breaks on Energy Star appliances.

The holidays are popular with shoppers who like getting a deal, retailers who like getting a flood of customers, and politicians who like getting credit for making it all happen. But critics on both sides of the political spectrum say sales tax holidays are an ineffective gimmick.

The Tax Foundation, a conservative research organization, argues that sales tax holidays don't actually encourage shoppers to buy anything. Instead, shoppers purchase things they would've bought anyway, but on a different day. Retailers still benefit from the arrangement, says Mark Robyn, an economist with the nonpartisan group. “It's sort of like advertising a sale,” Robyn says, “but they don't have anything to give up.”
Meanwhile, Citizens for Tax Justice disputes a common claim that the holidays help poor families save money on essential items. Matt Gardner, a policy analyst for the liberal group, says the tax breaks actually are geared toward upper-income families. “It’s a real question of who’s best positioned to take advantage of them,” he says. “Low-income people are less likely to shift the timing of their purchases.”

One point that both the Tax Foundation and Citizens for Tax Justice agree on is that since the holidays only include special items — school items during back-to-school season, guns and ammunition during hunting season — they still unfairly impose sales taxes on everything else. In other words, they discriminate against consumers who don’t go hunting every fall and don’t have to buy their children notebooks and pencils.

2010 SALES TAX HOLIDAYS FOR BACK-TO-SCHOOL ITEMS
•    Alabama: August 6-8
•    Connecticut: August 15-21
•    Florida: August 13-15
•    Illinois: August 6-15
•    Iowa: August 6-7
•    Louisiana: August 6-7
•    Maryland: August 8-14
•    Mississippi: July 30-31
•    Missouri: August 6-8
•    New Mexico: August 6-8
•    North Carolina: August 6-8
•    Oklahoma: August 6-8
•    South Carolina: August 6-8
•    Tennessee: August 6-8
•    Texas: August 20-22
•    Virginia: August 6-8
Source: Federation of Tax Administrators


Retail psychology

Retailers have their own studies to point to, showing positive impacts from sales tax holidays. One they like came from the Texas, where the state comptroller found that sales tax holidays saved shoppers $442 million from 1999 to 2008. In Florida, which is reinstating a back-to-school tax holiday after a two-year hiatus, the state retail federation sponsored a study that concluded that gross sales increased by about 8 percent during the month the school tax holiday was last held in 2007.

“The consumer loves it,” says Rick McAllister, president of the Florida Retail Federation. “It’s psychological. It’s hard to explain.”

But other studies support what the critics of sales tax holidays have to say. A 2009 University of Michigan study said as much as 90 percent of increased sales during a sales tax holiday could be attributed to consumers merely shifting their buying from one time to another. And a 2001 study from the University of West Florida suggests that retailers raise prices during sales tax holidays, helping themselves to some of the savings intended for consumers. However, this kind of profit padding can be difficult to measure.

One thing most tax experts agree on is that a few days of tax breaks on selected items doesn't do much to stimulate a state's economy. The amount of money involved is too small, and the event is over too quickly. That was one reason why Georgia was quick to get rid of its back-to-school tax break this year. Typically, according to Alan Essig, executive director of the Georgia Policy and Budget Institute, the event would cost the state around $15 million.

On the scale of Georgia's $17 billion budget, that’s not much. But during a budget crisis, every penny counts — especially in a state that's had to make significant cuts in education. As Essig puts it, “the idea of having a school tax holiday while laying off teachers and cutting school hours didn’t make sense.”

—Contact Joey Peters at jpeters-temp@pewtrusts.org

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July 20, 2010

137 DTR G-5

By Christine Grimaldi and Alison Bennett

Citizens for Tax Justice, along with several other groups, July 19 urged the bipartisan leadership of the House Ways and Means Committee to close a tax code loophole allowing companies to change their address—both within the United States and offshore—to circumvent tax liability.

In a July 19 letter to Chairman Sander Levin (D-Mich.) and ranking member Dave Camp (R-Mich.), the groups said BP oil rig owner Transocean shifted addresses from Texas to Delaware to the Cayman Islands to Switzerland.

Transocean reportedly “has shaved 15 percentage points and billions of dollars off of its U.S. tax bill over the past decade by strategically locating ‘headquarters’ to no- and low- tax jurisdictions,” according to the letter. “In fact, Transocean is one of at least six oil drilling companies to pick up shop and move their addresses overseas to work the system,” the letter added.

Inverted Companies Criticized

“These companies, known as inverted corporations, grow their business in the United States and establish a nominal presence in a foreign country for tax purposes. Right now remaining loopholes within our law permits profitable companies to legally skip out on their taxes and shift their tax burden to taxpayers and responsible businesses already facing tough times in this economy,” the letter added.

The call for closing the loophole comes as Ways and Means is expected shortly to drop energy tax legislation. “Companies that use our roads, are protected by our military and access our markets should pay their share of U.S. taxes,” the letter said.

The letter came the same day that CTJ unveiled two additional reports criticizing the tax structure surrounding the oil and gas industry and highlighting problems with the U.S. international tax system in the wake of the BP disaster.

CTJ Calls for Tax Incentive Shutdown

In the first report, What Oil and Gas Companies Extract—From the American Public, CTJ asserted, “The truth is that oil and gas companies have for years received a bonanza of unjustified tax breaks that serve only to boost profits for their shareholders,” and urged shutdown of the tax incentives.

CTJ said in its view, “these subsidies do not spur the exploration of new reserves nor stimulate alternative energy investment,” noting that in the top five oil companies, “managers direct most of their excess cash to dividends and stock repurchases.”

According to the report, the percentage of net profits directed at these areas for the top five oil companies was 58 percent in 2005, 73 percent in 2006, 72 percent in 2007, 71 percent in 2008, and 89 percent in 2009.

Generous tax treatment also does not encourage the companies to develop alternative energy, CTJ said, noting that reviews of oil company press releases, Securities and Exchange Commission filings, and published articles suggest that alternative energy investments approximate less than 5 percent of profits for the top five firms.

Section 199 Deduction Targeted

The group said Congress should:
• bar large oil and gas companies from using the deduction for domestic manufacturing under tax code Section 199;
• repeal the deduction for intangible costs of exploring and developing oil and gas sources;
• repeal percentage depletion for oil and gas products;
• reduce the break for amortization of geological and geophysical expenditures; and
• modify rules for dual-capacity taxpayers.

In its second report, Offshore Drilling and Taxes: Gulf Oil Spill Highlights Problems With the U.S. International Tax System, CTJ noted the relocations of Transocean, the owner and operator of the BP Deepwater Horizon Drilling Rig, and said the company has saved an estimated $2 billion in taxes because of its corporate inversion.

International Tax System Attacked

Although in 2004 Congress passed legislation to stop tax breaks for such inversions on a going-forward basis, “it did nothing to stop the tax breaks from continuing to be available to companies that had already pretended to move,” CTJ said.

Another area of weakness in the U.S. international tax system is its transfer pricing rules, the group said. It noted that Transocean is “one of many companies that is in trouble with [the U.S. Internal Revenue Service] and tax authorities in other countries over the way it accounts for those transfers.” The company's financial statements indicate a potential liability of $1 billion in additional taxes related to its transfer pricing methods, CTJ said.

The group said that although some have called for a complete overhaul of the international tax regime, there is no reason to delay addressing what it called “egregious abuses.”

Text of the CTJ report on tax treatment for oil and gas companies is online at http://ctj.org/pdf/energy20100709.pdf.
Text of the CTJ report on the U.S. international tax system can be found at http://ctj.org/pdf/drillingoffshore.pdf.

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July 16, 2010

By Christopher Moraff

As the saying goes, two things in life are certain: death and taxes. Unless you’re a multinational corporation.

In that case, if you’re on the brink of death—and “too big to fail”—the government might bail you out. As for taxes, the federal code is designed to help you avoid paying your fair share to the U.S. Treasury.

A bill introduced by Rep. Charles Rangel (D-N.Y.) that would chip away at some of these tax loopholes passed in the House on May 28, only to collapse less than a month later in the Senate under the weight of a GOP filibuster. Republicans say the legislation was too expensive. While boosting unemployment benefits and extending certain expiring tax credits, the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213) would have eliminated $14 billion of foreign tax credit loopholes, its drafters say.

Corporate tax avoidance is a costly problem. Last year, General Electric—which is divided into an industrial business, and a financial services business, GE Capital—paid no U.S. taxes, despite reporting consolidated profits of $11 billion. That’s because GE shifted its profits overseas, thereby incurring a U.S. loss of $498 million. “Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. and make lots of money overseas,” Forbes reported in April.

GE is not alone. In 2008, the U.S. Government Accountability Office (GAO) reported that nearly two-thirds of U.S.-domiciled corporations had not been paying federal income tax.

How much such “legal” tax avoidance schemes cost the Treasury is unknown since corporate tax documents, like personal returns, are not public. Estimates vary from $20 to $120 billion annually.

As a result, U.S. corporate income taxes now rank near the bottom among all developed countries. According to the White House, in 2004 U.S. multinational corporations paid $16 billion in U.S. taxes on $700 billion of foreign active earnings—an effective U.S. tax rate of 2.3 percent.

Among the techniques companies use to avoid paying U.S. taxes is what’s known as “transfer pricing.” Transfer pricing involves the fees subsidiaries of a corporation charge each other for intercompany exchanges. Firms abuse transfer pricing by shifting costly assets from places like the United States to low or no-tax jurisdictions, say, Luxembourg or the Bahamas. Intangible assets like patents and trademarks are especially attractive for income-shifting schemes since their value is arbitrary and therefore more open to distortion.

For example, a pharmaceutical company might transfer a drug patent to an overseas subsidiary in a low-tax jurisdiction (Ireland is a current favorite). It then charges its U.S. divisions, which account for the bulk of distribution, a hefty licensing fee for use of the patent. Thus, income is shifted to the patent-holding subsidiary, while the U.S. subsidiary records a loss.

Of the 100 largest U.S. corporations, 83 have subsidiaries in low-tax countries, according to President Barack Obama.

Rebecca Wilkins, a senior counsel of federal tax policy at the nonprofit Citizens for Tax Justice, says that corporate America has pushed tax avoidance schemes to the “brink of illegality.” “They’ve gotten incredibly creative at it and have many highly paid consultants helping them do it,” Wilkins says.

Take Goldman Sachs, which had an effective tax rate of 34 percent in 2007 on record profits of $11.6 billion. Yet a year later, the company’s tax rate had fallen to 1 percent.

How’d they do it? “If you look at their financials for that year, they pretty much tell you that it was due to the way they restructured the company and that they moved a lot of business offshore,” Wilkins says.

Lawmakers have long been aware of the abuses, but Wilkins doubts Capitol Hill has the “appetite” to address them.

In an e-mail sent to In These Times, Sen. Byron Dorgan (D-N.D.), who with Sen. Carl Levin (D-Mich.) commissioned the 2008 GAO study, called transfer-pricing abuse a “major problem.” “We must give the IRS new tools to help combat transfer-pricing schemes,” Dorgan writes. “It’s essential that we put the brakes on U.S. multinational companies that are moving profits offshore to avoid paying U.S. taxes they rightfully owe.”

Separately, on May 19, Rep. Lloyd Doggett (D-Texas), who sits on the tax-writing House Ways & Means Committee, introduced the International Tax Competitiveness Act, which limits the transfer of intangible assets to overseas subsidiaries.

“We need to be doing much more to combat international tax abuses,” Doggett said via e-mail. “It is particularly galling that some of the biggest recipients of the massive taxpayer bailout have subsidiaries in tax-haven countries.”

Doggett’s bill was assigned to the Tax Subcommittee of the House Ways & Means Committee, where it is being considered.

Yet one must wonder if a corporate power base with enough leverage to nearly take down the global economy and still finagle a $700 billion bailout from the federal government will ever be effectively reined in. While a handful of legislators cries foul, savvy corporations continue to play a game of hide-and-seek with the IRS. And all the while the U.S. Treasury bleeds.

Gannett News Service

July 9, 2010 Friday

Failed Boxer amendment could have helped H-P

By PETER URBAN

WASHINGTON - Republican challenger and former Hewlett-Packard CEO Carly Fiorina says Sen. Barbara Boxer has little to show for her 18 years in office, but at least one legislative victory paid off for HP.

The company was able to bring $14.5 billion in offshore earnings back home without owing Uncle Sam as much as 35 percent in corporate taxes, thanks to a 2004 law championed by Boxer and Sen. John Ensign, R-Nev.

Boxer and Sen. Dianne Feinstein,  D-Calif., voted for the proposal to offer a one-year tax amnesty to U.S. multinationals that repatriate their offshore earnings.

At the time, Boxer and Feinstein argued that U.S. multinational companies "have significant earnings from overseas that could be used to invest in the economic recovery, but the current tax structure gives them more incentive to leave those earnings overseas."
The proposal had been heavily lobbied by pharmaceutical and high-tech firms that stood to gain the most from the tax break, according to a 2003 report from the Center for Responsive Politics.

The Homeland Investment Coalition - representing 63 companies including Hewlett-Packard - lobbied for the tax break. Executives from those companies contributed $191,000 to members of the Senate Finance Committee and $154,000 to members of the House Ways and Means Committee, according to the nonprofit center, which tracks federal lobbying and campaign finances.Hewlett-Packard had about $14.5 billion in foreign earnings that qualified for the temporary deduction, according to company financial statements. Fiorina served as CEO of HP from July 1999 to February 2005.

In February 2009, Boxer made a similar plea for a temporary tax break as a way to help the economy. The new proposal would have cut the 35 percent top rate down to 5.25 percent for income repatriated in 2009 or 2010.

The measure was defeated 42-55 despite heavy lobbying from the high-tech industry and others with large cash holdings overseas. It was one of the 20 roll calls taken so far in the 111th Congress in which California's two senators sided with the Republican minority over their fellow Democrats.
The week before the Senate considered Boxer's amendment, Citizens for Tax Justice criticized what it described as a "lobbying blitz by multinational corporations" to promote a "scandalous lobbying proposal."

It noted that there was little evidence to suggest that the program produced any economic benefit to the nation, even as the U.S. companies had to pay only $8 billion in corporate taxes on $312 billion in repatriated earnings.

"Money is fungible," said Robert McIntyre, director of Citizens for Tax Justice. "You take it from one pot; you put it in another. Congress says you can't use repatriated profits for a prohibited purpose, but of course you can free up some other money and use that for the prohibited purpose."

A Congressional Research Service analysis published in January 2009 found that 10 of the top dozen companies that took advantage of the 2004 break cut jobs. Hewlett-Packard repatriated $14.5 billion and laid off 14,500. Pfizer repatriated $37 billion and cut 9,000 jobs in 2005.
California-based Oracle and Intel also repatriated foreign earnings. The money helped Oracle acquire two U.S. companies and helped Intel build a new factory.

The Business Roundtable, an organization of corporate chief executives that's supporting Fiorina's Senate campaign, lobbied in favor of Boxer's latest proposal. It commissioned economist Allen Sinai of Decision Economics to make a study promising that a repatriation tax holiday would have miraculous economic effects.

Sinai argued that amnesty did benefit the U.S. economy, according to a survey of several hundred of the businesses that took advantage of the program. The businesses reported that 25 percent of the money went to capital investments and 23 percent to hiring and training new workers.
Sinai said that a similar injection of offshore earnings into the U.S. economy would net about 614,000 new jobs and add $110 billion to the gross domestic product in 2010.

"A private-sector stimulus could be a win-win for government and U.S. businesses, without further straining an already overextended Federal Reserve balance sheet," he wrote.

Senate Democrats who opposed the Boxer measure said it would reward outsourcing of jobs.

"If we allow U.S. corporations to once again send the money they earn abroad back to the U.S. at a discounted tax rate, it will only lead to more companies moving their profits offshore," said Sen. Byron Dorgan, D-N.D.