By CHARLES WILBANKS / MONEYWATCH/ May 30, 2013, 4:57 PM

(MoneyWatch) Tax breaks will cost the American treasury nearly a trillion dollars this year. And most of that money goes to people at the top of the heap -- the very top.

That's the conclusion of a new study by the Congressional Budget Office, a non-partisan unit of the U.S. Congress. The CBO looked at 10 major tax breaks -- there are 200 overall -- including the earned income tax credit, itemized deductions, preferential tax rates for capital gains and dividends, and the child tax credit.

"More than half of the combined benefits of those tax expenditures will accrue to households with income in the highest quintile (or one-fifth) of the population -- with 17 percent going to households in the top 1 percent of the population," the CBO found.

Other tax breaks, such as the per-child tax credit of up to $1,000 and the earned income tax credit claimed by low-income households, generally benefit those in lower-income ranges. 

The issue of tax breaks has long been a sore spot in Washington, looming large during the 2012 presidential election. For the U.S.economy, such expenditures affect how much the federal government collects in taxes and figure in the ongoing debate over the nation's deficit.

A tax break is supposed to encourage productive activities, like homeownership, that benefit the economy as a whole. So a disproportionate allocation of these preferences to the wealthy raises fundamental issue of economic equity.

The CBO also said that when it measured the tax breaks relative to after-tax income in 2013, the 10 major tax expenditures are largest for the bottom fifth and top fifth of income earners. 

"The combined benefits will equal nearly 12 percent of after-tax income for households in the lowest income quintile, more than 9 percent for households in the highest quintile and less than 8 percent for households in the middle three quintiles," the CBO said.

Robert McIntyre, director of Citizens for Tax Justice, said many of the breaks, such as deductions for employer-paid health insurance and the child tax credit, are progressive, benefiting middle- and lower-income groups proportionally. But the huge breaks that help the wealthiest people in the country are wildly disproportionate.

"If you look at details, most of the distributions aren't that big of a problem," he said. "It's the capital gains -- that's the big one that's skewed to the top," he said. "Don't look at the top 20 percent -- look at the 1 percent. And within that it's capital gains, and capital gains at death that mainly go to the top 1 percent."

McIntye noted that lumping the top 20 percent of earners by income is misleading because it ranks billionaires alongside people making around $100,000 a year, an income typically considered middle class that doesn't collect huge amounts of investment income.

That distinction is particularly relevant to one of the tax expenditures the CBO looked at -- retirement contributions, a break that it noted benefits the top 20 percent. But it was primarily the least wealthy people in that group who reaped the biggest retirement tax rewards. 

Published: May 29, 2013

By Andrew Dunn — adunn@charlotteobserver.com

Charlotte’s largest companies have 5 billion reasons to keep their foreign profits stashed overseas: the $5 billion they’d owe Uncle Sam to bring the money back, an Observer review of securities filings shows.

The issue of U.S. firms using their foreign operations to avoid American taxes was reinvigorated earlier this month when Apple CEO Tim Cook was brought before a Senate panel to explain his company’s overseas earnings. A congressional probe found that billions in profits were earned by subsidiaries in Ireland with no employees.

In general, as long as the money stays out of the country, it isn’t taxed by the federal government. It’s taxed by the foreign government instead, often at lower rates.

Charlotte-based companies are making use of that tax structure, as well – totaling nearly $22 billion in earnings kept overseas, the Observer review found. If they were to bring those profits back to the U.S. to hire employees or buy equipment, they’d collectively owe that $5 billion tax bill, according to estimates provided in the filings.

Unsurprisingly, the vast majority of that comes from Bank of America, the state’s largest company by far and one with a large international presence. The Charlotte bank has $17.2 billion of undistributed earnings in its offshore subsidiaries, according to its latest annual filing.

Duke Energy, the nation’s largest utility, has about $2 billion in foreign profits that remain overseas, primarily from investments in Latin America. Five more of the city’s largest companies also report keeping some of their earnings offshore.

Of course, Apple appears to be an extreme case. Charlotte’s companies argue that their overseas profits came from actual operations serving international customers. The tech giant also had amassed overseas cash in quantities many times greater than what you’ll find anywhere else.

It’s unclear exactly how and where the Charlotte companies recorded their foreign profits. But their annual reports shine some light on their role in the international economy and how keeping money overseas can save millions. For example:

• SPX Corp. banked $27.8 million in 2011 by changing how it allocates expenses between U.S. and foreign subsidiaries. The industrial equipment maker paid an effective tax rate of 8.4 percent that year.

• The tax rate at Babcock & Wilcox rose from 25 percent in 2011 to 32 percent in 2012, in large part because of differences in where it recorded earnings in the two years. The energy technology company paid a foreign tax rate of 12 percent in 2011 – saving the company about $11 million in taxes from what it would have paid in the U.S.

The companies either did not respond to requests for comment or declined to speak.

‘Most economical sense’

The moves benefit shareholders, as well. Just as a person would want to avoid paying more in taxes than is required, so do companies.

Duke Energy argues that the current U.S. tax system makes it too “painful” to bring back these profits, vice president for tax Keith Butler said. In many cases, Duke would end up paying more than 40 percent in taxes on foreign earnings if they were returned to the U.S. The standard U.S. corporate tax rate is 35 percent.

“You’re looking at it and saying, ‘Gosh, you’d be crazy to bring those earnings back home,’ ” he said.

But progressive organizations such as Citizens for Tax Justice are still concerned about large companies’ role in a growing trend. Nearly one-fifth of the Fortune 500 increased their overseas profit holdings by more than $500 million last year – a total of $229 billion, a recent report found.

“It’s the biggest corporate tax issue,” Citizens for Tax Justice director Bob McIntyre said. “Apple’s just an example. This is the kind of things these guys do.”

Duke Energy got into the international business in the 1990s by buying utility infrastructure in Latin America. It’s still attractive to the company because of continually increasing demand for electricity in those countries – 6 to 10 percent per year, Butler said, when domestic demand struggles to reach 1 percent growth.

Duke could take the money it makes in countries such as Brazil and use it to build new power plants in the U.S. But especially with interest rates so low, it’s a lot cheaper to borrow money for projects in America than take the tax hit. Instead, the cash stays overseas to make more investments in those countries.

“As long as you’re finding those opportunities, it makes the most economical sense to take those earnings you’re making in the foreign jurisdictions and reinvest them,” Butler said, and not pay U.S. taxes on them. “That’s been Duke Energy’s philosophy.”

Bank of America’s corporate investment banking operations span the globe. Last year, about 13 percent of the bank’s revenues came outside the U.S., and a third of its pre-tax income. Bank of America spokesman Jerry Dubrowski said most of its overseas profits have come from the United Kingdom, Canada, Hong Kong and India.

“These are earnings in active foreign operations where we’re serving real customers,” Dubrowski said.

Legislative fixes

Despite lawmakers’ anger over this type of activity, a good portion of the blame can be reflected back on them. Cook told senators Tuesday that Apple is complying with an outmoded tax system that disadvantages American companies, according to The New York Times.

Both sides of the argument agree that the U.S. tax system is to blame. But the agreement ends there.

Duke Energy is one of a number of multinational businesses that argue in favor of a tax system where earnings are taxed only in the country where they originate. Companies would then be able to move capital freely.

That would eliminate the “lock-out” effect, said Kyle Pomerleau, economist at the nonpartisan Tax Foundation, which advocates for such a system. He said countries like the United Kingdom and Japan have gone that route.

But opponents say that would encourage companies to shift more of their earnings offshore to avoid more taxes. Instead, Citizens for Tax Justice takes the opposite approach. McIntyre, its director, suggests a policy where all profits are taxed at the U.S. rate, regardless of where they’re earned, with credits given to U.S. companies for their foreign taxes paid.

Though politicians in both parties have discussed tax reform, it is unclear whether there will be enough momentum to accomplish it.

“It would be tragic if they didn’t look at it,” Pomerleau said. “The United States is falling farther and farther behind the rest of the world when it comes to sensible corporate tax reform.”

Until then, companies are going to work within the system. Because of that, Butler said the Senate’s criticism of Apple was an unfair attack.

“They are minimizing the amount of tax they have to pay in compliance with the laws,” he said. “That is exactly what Duke Energy does.”

By Phil Mattera, Dirt Diggers Digest

In 2010 Texas Rep. Joe Barton took the bizarre step of apologizing to BP for the Obama Administration's effort to get the oil giant to compensate those affected by its massive spill in the Gulf of Mexico. Barton faced a firestorm of criticism and had to retract his statement.

It will be interesting to see if Sen. Rand Paul has to do the same with his outrageous statement the other day arguing that the Senate should apologize to Apple for the report of its investigations subcommittee documenting brazen tax dodging by the company. "I would say what we really need to do is to apologize to Apple, compliment them for the job creation they are doing, and get about doing our job," Paul declared at a hearing to discuss the report.

I don't know how Apple CEO Tim Cook restrained himself from jumping up and giving Paul a big wet kiss on the lips. Cook instead offered testimony that was part P.R. spiel about the wonderfulness of Apple and part outright dishonesty about its tax practices. Among his claims: "Apple does not use tax gimmicks."

The problem is that the investigations subcommittee's 40-page report described an array of loopholes and tricks by which Apple has shielded tens of billions of dollars from federal taxation. At the center of the scheme is the artificial designation of vast amounts of cash as being held offshore to keep it outside the reach of the IRS. That hoard, which now totals more than $100 billion, is actually, the New York Times reports, held in bank accounts in New York in the name of Apple subsidiaries based in Ireland.

For tax purposes, Apple claims that its key Irish entity has no legal residency (nor a physical presence or employees), meaning that it is not effectively taxed anywhere. A recent analysis by Citizens for Tax Justice concluded that Apple has paid "almost no income taxes to any country" on its offshore stash. This undermines the arguments made by Apple and other corporations for a new repatriation tax holiday or a shift to a territorial tax system.

"Apple has a very strong moral compass, and we believe in really good corporate citizenship," Cook recently told the Washington Post. That claim was already preposterous, given past revelations about abysmal working conditions at the company's supplier plants in China.

Tax dodging, unfortunately, is not widely regarded as being on a par with sweatshops as an indicator of corporate social irresponsibility. Apple, for instance, feels compelled to publish material asserting that it and its suppliers support labor and human rights and that they operate in an environmentally sound manner. There is no such statement on its website about compliance with tax laws.

Apple, like just about every other large corporation, not only manipulates the federal tax code but does the same at the state and local level, both through accounting schemes and by negotiating economic development subsidy deals, which frequently include corporate income tax credits, business property tax abatements and the like.

Last year, for example, Apple took an $89 million subsidy package to build a data center in Reno, Nevada that was expected to create only 35 permanent Apple employees. Three years earlier, Apple got a state subsidy package in North Carolina worth over $46 million (plus more at the local level) for a similar facility that was projected to produce only 50 permanent jobs.

Apple and other companies justify the taking of subsidies because it is legal and because it is usually linked to job creation, though in the case of Apple the number of jobs, at the data centers at least, is minute compared to the lost tax revenue.

What demands by rich companies for subsidies they don't need really shows is that tax minimization is not, as corporate apologists would have us believe, just a response to the complexity of the federal tax code. It is a compulsion to increase net income, regardless of the consequences for the public. That is part of the definition of corporate irresponsibility.

Companies like Apple will continue to get away with fiscal murder until tax dodging and excessive subsidy taking are as stigmatized as the use of sweatshop labor and toxic dumping. At that point, even politicians of Rand Paul's ilk might have to think twice about challenging the right of Congress to investigate unscrupulous tax accounting practices.

by Lauren Feeney

Earlier this week, a Senate panel investigated how Apple avoided billions in taxes through a web of offshore subsidiaries “so complex it spanned continents and went beyond anything most experts had ever seen.” Although the company may have achieved, in the words of Sen. Carl Levin, the “holy grail of tax avoidance,” senators didn’t accuse Apple of doing anything illegal and it is by no means alone in its use of loopholes and gimmicks to avoid paying taxes.

Here’s a list, topped by Apple, of 10 companies that increased their offshore holdings in the past year.

Read more about this chart on the Citizens for Tax Justice site.

The U.S. corporate tax rate is 35 percent — one of the highest in the world — but as The New York Times reported yesterday, the effective corporate tax rate (what companies actually pay) “fell to 17.8 percent in 2012 from 42.5 percent in 1960,” according to the Federal Reserve Bank of St. Louis. Another chart from the Citizens for Tax Justice shows 10 companies that managed to do much better than average, paying little or no taxes for the past five years. Dollar amounts are numbers in millions and “rate” is the effective tax rate that the companies paid.

Read more about this chart on the Citizens for Tax Justice site.