Month: August 2015

Earlier this month, the Securities and Exchange Commission finalized a new rule that will require most public corporations to disclose the ratio between CEO pay and median wages for rank-and-file employees. This rule will give shareholders and the public a clearer window on how corporate salary structures are affecting income inequality.

But while this rule represents an important step toward understanding how specific corporations are compensating ordinary workers compared to corporate executives, it also highlights the inadequacy of an even more fundamental way in which many corporations are likely undermining all middle-income working families: corporate tax avoidance.

Congress and federal regulators have it in their power to bring corporate tax dodging into the light just as they’ve done with executive pay, and should move quickly to do so.

Many of the biggest corporations avoid hundreds of billions of dollars in U.S. taxes in a way that is virtually impossible to glean from their public filings. Big corporations keep shareholders in the dark about whether they are using foreign subsidiaries to avoid paying their fair share of U.S. taxes. Corporate tax filings, for example, often omit disclosure of tax-haven subsidiaries and fail to acknowledge whether the company’s offshore cash is subject to any income tax by any country. Less corporate tax revenue has a direct and corrosive impact on economic inequality just as the executive pay levels do. This should matter to all taxpayers because every billion that a corporation dodges in taxes ultimately must be made up by either taxing individuals at higher rates or drastically cutting funding for vital government services and programs.

And the billions add up fast: a CTJ report earlier this year found that Fortune 500 firms are likely avoiding as much as $600 billion in federal income taxes through the use of offshore tax havens. As CTJ has noted before, there are straightforward steps Congress and the SEC can take that would allow shareholders to know when their investments are supporting tax-dodging corporate leadership.

Lavish CEO pay directly disadvantages a corporation’s middle-income workers, and the new SEC disclosure will hopefully help shame some big companies into treating all workers more equitably. But until the largest corporations are required to be transparent in their use of offshore tax havens, these companies will continue to erode the take-home pay of all working families in a way that is far less visible than the pay ratios public corporations must now disclose.

The online craft website Etsy is facing new scrutiny for its recent decision to shift some of its intellectual property into a secretive Irish subsidiary. As Bloomberg reported last week, the company’s Irish subsidiary has been made into an “unlimited liability corporation,” a form that exists primarily to avoid disclosure of even the most basic financial information. This behavior might elicit yawns from a public weary of tax-avoidance tales from Apple to Xerox, except for one important detail: Etsy is one of the first publicly held corporations to structure itself as a “B corporation,” or benefit corporation — and as such, is required to act in a socially responsible manner.

While the criteria for being a “B corporation” vary by state, the common theme is that a company claiming this status must keep in mind not just its bottom line, but also “workers, community and the environment.” This is important because when corporate executives are called on the carpet to defend their tax-dodging ways, they routinely cite their fiduciary responsibility to their shareholders as the reason why tax avoidance is not only acceptable, but something they simply must do. B corporations were supposed to change all that. But apparently not: Etsy has engaged in a tax-avoidance two-step. First, like prominent tech corporations such as Microsoft, Etsy has found a way to move its intellectual property to a subsidiary in a low-rate tax haven. Then, on top of that, Etsy changed the legal form of its subsidiary so that it wouldn’t have to disclose how much money it is funneling into its tax-haven Irish subsidiary.

When Google chooses “don’t be evil” as its corporate slogan, it’s just that: empty sloganeering. The company can, and should, face merciless scorn for the ways in which its tax-dodging practices violate that supposed ethos, but at the end of the day, as long as what it’s doing is legal, no one can stop them. In contrast, B corporations are, at least in theory, held to a higher standard. Yet already in the pages of Fortune, Etsy’s behavior is being defended as “just being loyal to its shareholders.” This raises the question of whether the B corporation’s mandate for social responsibility extends into the tax policy realm — or whether the folks at Fortune simply haven’t noticed that Etsy is a different kind of corporation.

The good news is that the organization responsible for B corporation certification, B Lab, is on the case. It turns out that a change in ownership, including an initial public offering (IPO), requires that companies with B corporation status must recertify their status. One of the questions Etsy must answer as part of its re-application for B corporation status is “[h]as the Company reduced or minimized taxes through the use of corporate shells or structural means.” But as tax expert Robert Willens noted in the Wall Street Journal last week, “[t]here is nothing to be gained other than tax savings” from what Etsy has done.

The advent of the B corporation could be a welcome trend in corporate governance, opening the door for business leaders to think about important social policy outcomes, rather than just cold hard cash, in making their executive decisions. Responsible taxpaying is only one part of the high standards to which B corporations are held. But tax avoidance is a basic and fundamental betrayal of corporate citizenship. If Etsy is recertified despite persisting in its offshore tax hijinks, it will be harder to take seriously the “benefit corporation” label.

Donald Trump’s recently released framework for immigration reform includes misleading statements about “illegal immigrants” claiming refundable tax credits. Trump claims that “illegal immigrants” received $4.2 billion in “free” tax credits in 2011 and proposes to pay for part of his immigration proposal by accepting the Treasury Inspector General for Tax Administration (TIGTA)’s “recommendation” to eliminate tax credit payments to these individuals. It’s hard to know where to start in deconstructing the inaccuracies in Trump’s statement.

First, the use of the word “free” is highly misleading, as undocumented immigrants do pay a significant amount in local, state, and federal taxes.  An analysis by the Institute on Taxation and Economic Policy (ITEP) estimated that in 2012, undocumented immigrants paid $11.8 billion in state and local taxes (including about $7 billion in sales and excise taxes, $3.6 billion in property taxes, and $1.1 billion in income taxes). On top of this, the Social Security Administration’s Office of the Chief Actuary estimated that in 2010, unauthorized workers (who may be undocumented or in the country legally but without permission to work) paid $12 billion in Social Security payroll taxes net of benefits received. Since most unauthorized workers are not eligible for Social Security benefits, this group only received approximately $1 billion in benefits for the $13 billion paid in.

Second, the $4.2 billion figure that Trump references is from a 2011 TIGTA report that actually states that families with an unauthorized worker received $4.2 billion in 2009 (not 2011) through the refundable portion of the Child Tax Credit (known as the Additional Child Tax Credit). While this may sound the same on the surface, there are a few things that should be noted. As the report explains, these credits were claimed by taxpayers using an Individual Taxpayer Identification Number (ITIN), which the IRS issues to individuals not eligible for a Social Security Number. ITINs are issued without regard to immigration status to people not authorized to work in the United States, so this group includes not just undocumented immigrants but also individuals who have immigrated legally but aren’t legally able to work.

Taxpayers using an ITIN are prohibited from receiving the Earned Income Tax Credit (EITC) but are allowed to claim the Child Tax Credit (CTC). Worth up to $1,000 per qualifying child, the CTC is intended to offset the costs of raising children. Families who owe less in taxes than their eligible Child Tax Credit amount can receive the difference through the Additional Child Tax Credit, which is paid out with their tax refund. Since the CTC is intended primarily to benefit children, it makes sense that it is the children’s immigration status, not the parents’, that qualifies a family to receive the credit, and a qualifying child can be a citizen, a U.S. national, or a resident alien. And although some portion of the $4.2 billion in Additional Child Tax Credits could be going to families with undocumented parents, nearly 80 percent of the children of undocumented immigrants are U.S. citizens.

It is also worth noting that the refundable tax credits like the EITC and CTC have immense benefits for the children in the families that receive them. There is a growing body of research showing that these credits improve educational and health outcomes for children and result in them working hard and having higher earnings as adults.

Third, while Trump says that his plan would “accept the recommendation” of TIGTA to eliminate tax credit payments to illegal immigrants, the 2012 TIGTA report that he references makes no such recommendation. In actuality, the report recommends that the IRS implement procedures to reduce the number of fraudulent ITIN applications that it approves. TIGTA’s main concern here is that people are using fraudulent documents to obtain an ITIN and using it to file fraudulent tax returns (e.g. claiming tax refunds for non-existent persons), not the use of ITINs by undocumented immigrants.

Finally, if the concern is the $4.2 billion revenue loss, Trump should look to comprehensive immigration reform that allows a path to citizenship for undocumented immigrants, which would actually increase revenues at the federal, state, and local levels. The Congressional Budget Office (CBO) estimated that the 2013 Senate comprehensive immigration reform bill would have decreased the deficit by $197 billion over ten years, as newly legal immigrants would pay $459 billion in additional taxes, while the increased government expenditures for benefits would only increase by $262 billion. Additionally, ITEP estimated that granting citizenship to all undocumented immigrants would raise more than $2.2 billion annually in state and local revenues. These revenue increases would occur because more immigrants would then be paying taxes on their income and because citizenship is likely to boost wages and therefore increase income, sales and property taxes. Trump might want to consider these benefits instead of spending all his time planning for that wall.

For more on Trump’s tax proposals, click here.

Budget gridlock continues in a few states across the country, including North Carolina where lawmakers are dragging through one of the longest sessions in 40 years, and taxpayers have already spent an extra $1 million to keep the legislature in session. House and Senate leaders agreed on a $21.74 billion budget, or roughly the mid-point between the two chambers’ spending packages passed earlier this summer.  However, lawmakers now need to agree on how to spend the money.  As a News and Observer editorial notes, such a restrictive level of spending keeps the state’s budget “suspended in the recession’s gloomy economic period.” A proposed change to local sales tax revenue also caused deadlock. Rural legislators would like to redistribute local sales tax revenue from urban areas and tourist destinations to their jurisdictions, while legislators from those places say the change would require a tax hike on their constituents. Last week legislators passed a stopgap funding measure through Aug. 31.

The Michigan House this week again debated road funding but adjourned Wednesday without a deal, the latest move in a long debate that has already defeated a ballot measure and threatened the state’s EITC. After voters torpedoed a sales tax increase at the polls that would have paid for transportation improvements, both chambers of the legislature passed alternative funding plans. The compromise package called for $600 million in new fuel tax and vehicle registration tax increases as well as a transfer of $600 million in income tax revenue from the general fund. Gov. Rick Snyder and Democratic legislators balked at the general fund transfer, while Republicans in the House were slow to rally around the new taxes. Both houses of the legislature will return after Labor Day.

A controversial education tax credit in Kansas is drawing fire from critics who say it directs public money to religious schools. Created in 2014, the Kansas Low-Income Students Scholarship Program allows non-profit organizations to collect donations from businesses to pay private school tuition for low-income students who attend public schools with low test scores. In return, businesses are allowed a state income tax credit equal to 70 percent of their donation. More than 50 private schools, many of which offer religious education, have signed up for the program. Opponents of the scholarships say the program is unconstitutional, as Article 6 of the State Constitution states “No religious sect or sects shall control any part of the public educational funds.”

New Jersey lawmakers are trading proposals to cut taxes on yacht owners with Gov. Chris Christie. Lawmakers sent a budget to the governor that capped the 7 percent sales tax on yachts at $20,000, a windfall for boats costing more than $286,000. Christie vetoed that measure and responded with a plan that would halve the yacht sales tax from 7 percent to 3.5 percent. Marinas and boat retailers favor the governor’s plan. The vetoed plan would have cost between $3 million and $4 million; estimates on the governor’s alternative are not available but are expected to be higher. Legislators will consider Christie’s proposal when the legislature reconvenes, perhaps as soon as September.

As West Virginia legislators continue to consider changes to the state’s income tax structure to draw more businesses, state Commerce Secretary Keith Burdette questioned whether such an effort was necessary. Burdette pointed out that location was the number one reason that companies chose not to expand in the Mountain State:  “We don’t lose prospects over taxes; I’m not sure we lose them over regulations any more. We lose them over site.” Burdette also pointed out that the state’s lack of an educated workforce hurts business recruitment efforts. “Simply making us the lowest cost state without acknowledging and focusing attention and resources on other factors which make an attractive business climate would be a mistake,” Burdette acknowledged. 

Hillary Clinton recently announced a $350 billion proposal to make college more affordable. It would be paid for by capping the value of itemized tax deductions for high-income households. It appears that the plan is a watered down version of President Obama’s proposal to cap the tax savings from a longer list of deductions and exclusions at 28 cents per dollar deducted or excluded.

Both Clinton and Obama’s plans would affect only taxpayers in tax brackets above 28 percent (currently the 33, 35, and 39.6 percent brackets). Thus, it would limit deductions only for single taxpayers earning more than $200,000 and married couples earning more than $250,000, and its effects would be trivial until incomes are much higher than that.

A CTJ analysis of President’s Obama’s broader proposal to limit the value of various deductions, which would have raised an estimated $529 billion over 10 years, found that only about three percent of taxpayers would see any tax increase, and that three-quarters of the tax hike would be paid by the best-off one percent.

The upside-down nature of tax deductions and exclusions means that taxpayers in higher brackets receive a greater percentage benefit than those in lower brackets.  For instance, taxpayers in the top bracket can save almost 40 cents for each dollar deducted while taxpayers in the 15 percent bracket save only 15 cents on the dollar. And, of course, low- and moderate-income taxpayers are much less likely to itemize deductions because their potential deductions are generally less than the flat standard deduction.

The American public would be unlikely to endorse a direct spending program that awarded its greatest percentage of benefits to the wealthiest taxpayers. But this type of top-heavy subsidy often seems to escape scrutiny when it is provided through the tax code. Clinton’s plan to limit the value of itemized deductions to 28 percent on the dollar is a step in the right direction.

Yet another American company has announced its intention to carry out a corporate inversion, a fancy term for buying a smaller company, completing some paper work and, for tax purposes, declaring its new headquarters are in a foreign nation.

This time it’s Terex, a Connecticut-based heavy equipment and crane manufacturer, which just announced a proposed deal to purchase a Nordic rival and become a resident of Finland. But if it is doing it for tax purposes, as appears the motivation for most corporate inversions, the most likely reason is not Finland’s 20 percent corporate tax rate.

Like many Fortune 500 corporations, Terex has little reason to complain about the 35 percent statutory U.S. corporate tax rate since it pays nothing near that much. In the past three years, Terex has enjoyed $774 million in U.S. pretax income and has paid just $84 million in federal income taxes on those profits or, a federal tax rate averaging just 10.8 percent. This is just about half the 20 percent statutory rate applied by Finland.

Finland’s tax rate is likely not Terex’s motivation for inverting. But there is another, more unsavory way in which taxes might figure into this story: the company’s large and growing cash stash. At the end of 2014, Terex disclosed holding $800 million of its profits as permanently reinvested foreign income, profits it has declared it intends to keep offshore indefinitely. If the company is stashing these profits (at least on paper) in a zero-rate tax haven such as the Cayman Islands—a clear possibility, given the existence of its “Genie Cayman Holdings” subsidiary and similarly named shell corporations in the British Virgin Islands and Bermuda—then the tax stakes for Terex could indeed be real. Reincorporating abroad would allow Terex to avoid ever paying a dime in U.S. income tax on any profits in these tax havens. And if the experience of prior inversions is any guide, a Finland-headquartered Terex will likely move aggressively to artificially shift even more of its U.S. profits into low-rate tax havens.

The case of Terex and its proposed move to Finland negates arguments by some U.S. lawmakers who claim that United States should lower its statutory tax rate to prevent companies from renouncing their citizenship. Terex has paid a 10.8 percent effective rate over three years. How much lower should its tax rate be?

The truth is, for companies seeking to avoid paying their fair share, zero percent will always be a very attractive tax rate. Rather than trying to stem the flow of inversions by cutting the U.S. tax rate closer to Finland’s, Congress should remove the incentive for corporations to shift their profits to beach island tax havens by repealing the loophole that allows companies to indefinitely defer paying U.S. tax by using accounting fictions to pretend their profits are earned offshore. Such a move would likely put an immediate stop to the inversion trend and would make our tax system fairer to boot.

Puzzle this. Microsoft believes the U.S. government is trying too hard to prove that it’s avoiding federal income taxes. The latest legal salvo out of the company’s Redmond, Wash., headquarters alleges that the IRS improperly hired outside lawyers to help prosecute its tax avoidance case against the tech giant.

But the company’s newest annual financial report, released without fanfare late last Friday, inadvertently confirms that the IRS’s assertion that Microsoft is shifting its profits offshore for tax purposes is basically true.

Like other corporations, Microsoft is required to annually disclose its offshore “permanently reinvested earnings” — profits that it has declared, for tax purposes, to be foreign profits that the company has no intention of repatriating to the United States. Companies also disclose the amount of tax they would pay if these profits were officially repatriated to the U.S. If Microsoft wants to convince the IRS, or the American public, that it is innocent of the tax-dodging charges that have been leveled against it, these disclosures aren’t helping its cause.

Microsoft’s latest annual report discloses that the company now has a total of $108.3 billion in permanently reinvested offshore profits, an astonishing $15 billion jump over the $93 billion they reported at this time last year. But some things don’t change: the company says that its U.S. income tax on repatriation of these profits would be $34.5 billion, or a 31.9 percent tax rate.

Since the tax due on repatriation is 35 percent minus whatever tax has already been paid to foreign governments, this means that Microsoft has paid an effective income tax rate of just 3.1 percent on its $108.3 billion offshore hoard, the same tiny rate that it reported last year. This disclosure strongly indicates not only that Microsoft is offshoring its profits more aggressively than any other company except Apple, but also it is continuing to put these profits — at least on paper — in low- or no-tax countries. Of course, this is exactly what the IRS is accusing Microsoft of doing.

So here’s the inconsistency: In its annual financial reports, Microsoft dutifully admits that it is aggressively stashing its profits in offshore tax havens, even as it protests the vigor with which the IRS is trying to crack down on this tax-avoidance activity. Perhaps the company’s PR and accounting departments need to get on the same page.

Congressional leaders are using a discredited economic theory to help push through a costly package of tax cuts that mostly benefit large corporations.

Last week, the Joint Committee on Taxation (JCT) scored the Senate’s version of controversial tax extenders legislation using dynamic scoring, a method that purports to quantify the macroeconomic effects of tax changes based on widely discredited supply-side economic theories.

The tax extenders bill is the first to be subject to a House rule passed earlier this year requiring the JCT to project the cost of substantial tax legislation using both the conventional (static) method of scoring as well as dynamic scoring.  

The tax extenders are a package of various temporary tax breaks that Congress has to vote to renew every two years or so. The bulk of the cost of the package are attributable to a few tax breaks for corporations, such as “bonus depreciation,” the research tax credit and the “active finance” exception.  As we have pointed out before, tax extenders are mostly bad policy and an example of congressional hypocrisy, as the costly business tax breaks are deficit-financed while Congress insists that the costs of legislation benefitting low- and middle-income families be offset by spending cuts.

Using dynamic scoring allows lawmakers to grossly underestimate the true cost of the tax breaks. The JCT estimates that the corporate tax cuts in the extenders bill would lead to slightly higher economic growth in the short term, thereby reducing the projected cost of the bill by about 11 percent.

Of course such sleights of hand are nothing new. For more than a decade, Congress has vastly understated the cost of the extenders by enacting them for only short periods, even though everyone expects them to be reenacted continually. According to the Congressional Budget Office, making these tax breaks permanent would cost more than $700 billion over 10 years.

This year, Congress has added dynamic scoring to its skullduggery. The scoring method employs a primitive economic model that is based on the assumption that tax cuts for corporations and the wealthy almost always will be good for the economy.  In contrast, the model assumes programs and tax changes that help ordinary taxpayers will be economically harmful.

Historically, these supply-side assumptions have not passed muster. The theory got a full-blown test under President Ronald Reagan in 1981, and it failed miserably, as Reagan himself soon acknowledged.  Even the Treasury Department under President George W. Bush essentially refuted the idea that tax cuts necessarily lead to economic growth. 

Even with the assumption of short-term economic growth, JCT notes that the extenders bill will result in decreased economic growth in the long run, and thus reduce revenues, due to the larger federal debt and associated increases in private borrowing costs. While this long-run effect is anticipated to be “small,” JCT did not specify what it means by small, so the slowdown could very well reverse the alleged tiny growth increase projected within the 10-year budget window.

Congress, however, will probably ignore this caveat, and, conveniently, focus solely on the short-term economic boost that is mistakenly assumed to result from tax cuts for corporations and the wealthy, while neglecting the long-term economic harm.

The flaws of dynamic scoring come on top of the long-time problem with the conventional cost estimate, which vastly understates the true 10-year cost of the tax extenders.  The Senate extenders bill would extend the expired tax provisions retroactively to the beginning of this year and through the end of 2016. The two-year cost of these measures would be $170 billion. But the Joint Committee staff’s analysis makes the ahistorical assumption that the provisions will actually expire after 2016. Because the biggest item in the bill, “bonus depreciation,” trades lower revenues in early years for higher revenues later when that provision will allegedly expire, the 10-year cost estimate for the bill ends up being lower than the two-year cost, at only $97 billion.  Dynamic scoring then brings the official cost estimate down to $87 billion.

Corporate lobbyists and their congressional allies may be pleased with JCT’s questionable dynamic scoring estimate that makes the extenders bill appear slightly less costly. But they may be disappointed at how small the alleged positive economic effects are. The rest of us should be very worried, however, that the JCT staff seems to have bought into a diluted version of the long discredited supply-side economics theory.

Former New York Gov. and now presidential candidate George Pataki has made cutting taxes one of the central themes of his political career. In fact, Pataki has repeatedly said over the years that “I’ve never met a tax cut I didn’t like.” His tax cuts largely went to New York’s wealthiest taxpayers and deprived the state of critical revenue over his tenure as governor.

Tax Record as Governor of New York

From the outset, Pataki pushed a series of regressive tax cuts including dropping income tax rates 25 percent across the board, cutting the corporate tax rate, and expanding areas with low taxes called enterprise zones, special districts with lower tax rates. These were followed by a series of cuts to other taxes, including the beer tax to the bank tax. By his own estimate, Pataki claims to have cut 19 different taxes and “saved” New Yorkers $140 billion during his entire time as governor.

Pataki’s fervor triggered a destructive tax-cutting competition with the legislature in the late 1990s when the speculative boom on Wall Street temporarily fueled state tax revenues. It was in the midst of this fiscal recklessness that the governor and the legislature eliminated New York City’s commuter income tax over the objections of New York City’s then Mayor Rudolph Giuliani, and despite the fact that the average commuter enjoyed salaries twice as high as those of the average New York City resident.

While Pataki is happy to tout his tax cuts at the state level, he conveniently leaves out the fact that these cuts meant substantial reduction in aid to local governments and schools. This actually compelled local governments across the state to increase property taxes (which are significantly more regressive than the state-level income taxes) to make up the difference, with lower-income school districts bearing even more of the brunt.

The damage to the state’s public investments did not end there. The tax cuts meant devastating cuts to the Metropolitan Transit Authority’s capital spending. Just a few years after Pataki’s final term, lawmakers had to pass a massive financial rescue of the MTA system.

The consequences of his irresponsible tax cutting would have been even more devastating, but two things helped cushion the impact. First, in 2003 state lawmakers overrode a veto by Pataki and enacted income tax surcharges on taxpayers with incomes over $100,000 to help cover the substantial state budget gap caused by the early 2000s recession, corporate financial scandals and the aftermath of the 9/11 World Trade Center attacks. In addition, Pataki’s tax cuts were aided by the run-up in the stock market during his early years as governor, which provided a larger base of revenue.

It is also worth noting that Pataki sold his tax cut along classic supply-side lines, meaning that he argued that tax cuts would jumpstart the economy to such an extent that they would be well worth it. After all was said and done however, Pataki’s tax cuts are yet another example of how tax cut-driven economic growth strategies always fall flat.

Record as a National Figure and Candidate for President

During his time as governor and in the years since, Pataki has staked out several positions on federal tax policy issues.

Pataki has explicitly staked out a position against the creation of a national sales tax. The resolution that he endorsed makes a federalist case against the tax, pointing out that the sales tax base has historically been “reserved for and relied on by state and local governments.”

Despite his experience running up the debt in New York, Pataki attempted to stake out a position as a deficit and debt hawk in 2011 by starting an advocacy group called “No America Debt.” While his group was supposed to be anti-debt, the reality is that it was counter-productive to this effort in that it advocated against any form of revenue increases as part of an ultimate debt reduction agreement, a position rejected by most of the public.

In the early stages of his candidacy for president, Pataki has been vague about his vision for reforming the federal tax system, crucially leaving out whether he believes more revenue should be raised through tax reform. His announcement speech, for example, noted that the tax code should be replaced with one that is “simpler” and has “lower rates that are fair to us all.” While this says very little about what he would actually do in real terms, he did go a step further at an event in Iowa where he said that he would eliminate virtually all tax exemptions and credits with the exception of the mortgage interest deduction and child tax credit. The key question is whether Pataki would really advocate eliminating very popular tax breaks like the charitable deduction and how he would structure any sort of tax rate reductions. Without knowing this, it’s impossible to know whether he would seek a tax reform that would be revenue reducing and how it would impact the distribution of the tax code.