Tag: Archive

July 7, 2016 09:00 AM | Permalink |

Read the ‘Earnings Stripping’ Letter in PDF

Read the ‘Serial Inverter’ Letter in PDF

Citizens for Tax Justice (CTJ) submitted comments this week in support of two parts of the Treasury’s proposed anti-inversion rules, the Serial Inverter Rule and the Earnings Stripping Rule, while also urging Treasury to take additional action to curb corporate inversions. 

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COMMENTS TO THE U.S. TREASURY DEPARTMENT AND THE INTERNAL REVENUE SERVICE ON THE PROPOSED “SERIAL INVERTER” RULE

Docket Name: Inversions and Related Transactions (REG-135734-14)
Docket ID: IRS-2016-0015-0002
Docket RIN: 1545-BM45

Dear Secretary Lew,

Citizens for Tax Justice is a nonpartisan public interest research and advocacy organization fighting to give American citizens a greater voice in tax laws at the federal, state and local levels. We have frequently spoken out against the practice of corporate tax inversions, which occur when a U.S. company, upon merging with a foreign company, reincorporates itself as a foreign entity and escapes paying U.S. taxes. The Joint Committee on Taxation estimates that corporate inversions could result in a loss to Treasury of $34 billion over the next 10 years; this money could be spent to improve the lives of countless Americans. As a public interest organization, we believe that the American taxpayer should not have to make up for the revenue loss created by this kind of corporate misbehavior.

We strongly support the proposed rule on Inversions and Related Transactions (Docket ID: IRS-2016-0015-0002), also known as the “serial inverter” rule. This action will prevent multinational corporations from circumventing current anti-inversion regulations by engaging in multiple inversions in a three-year period. This proposed new rule will take an important step toward putting an end to offshore tax avoidance.

We’ve already seen the positive impact of the proposed serial inverter rule in the case of Pfizer, which abandoned its planned $125 billion merger with Allergan shortly after the rule was proposed. This action alone may have saved U.S. taxpayers as much as $40 billion in taxes on offshore profits that Pfizer could have avoided by inverting and will likely prevent billions more revenue losses in the future by preventing other companies from inverting.

While curbing the abuse of serial inverters will undoubtedly help ameliorate the problem of corporate tax avoidance and inversions, further steps can be taken. The Treasury Department should go beyond the scope of this rule to prevent “hopscotch loans,” which occur when inverted U.S. companies escape paying taxes on dividends by loaning to a foreign parent, bypassing the U.S. parent. As we’ve noted in a previous letter, Treasury should expand on its prior Notice 2014-52 by further limiting the ability of inverted firms to use these hopscotch loans and to decontrol their foreign parent companies to avoid taxation. It should do so by applying its rules to all expatriating companies, or at least to those which maintain 50 percent ownership by the original shareholders of the U.S. firm. There is no reason to link these rules to section 7874 (which sets 60 percent as the threshold) considering the broad authority that Treasury has in Section 956.

A recent study by Citizens for Tax Justice found that U.S. companies likely owe up to $695 billion in taxes on the $2.4 trillion in earnings that they stash offshore. The amount held offshore, and thus the amount companies are avoiding in taxes, grows by hundreds of billions of dollars each year. This must end. In the absence of Congressional action to fix this problem, Treasury should take every possible step to prevent the base erosion and profit shifting created by corporate tax inversions and other corporate tax avoidance.

Thank you for your careful consideration of these comments.

Sincerely,

Robert S. McIntyre
Director of Citizens for Tax Justice

 

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COMMENTS TO THE U.S. TREASURY DEPARTMENT AND THE INTERNAL REVENUE SERVICE ON THE PROPOSED “EARNINGS-STRIPPING” RULE
JULY 7, 2016

Docket Number: IRS-2016-0014-0002
Docket Name: Treatment of Certain Interests in Corporations as Stock or Indebtedness (REG-108060-15)
Docket RIN: 1545-BN40

Dear Secretary Lew,

Citizens for Tax Justice is a nonpartisan public interest research and advocacy organization fighting to give American citizens a greater voice in tax laws at the federal state and local levels. We have frequently spoken out against the practice of corporate tax inversions, which occur when a U.S. company, upon merging with a foreign company, reincorporates itself as a foreign entity and escapes paying U.S. taxes. While inversions have recently drawn public attention, the overall cost of offshore corporate tax avoidance is enormous. One recent estimate found that profit shifting costs the United States over $100 billion per year. As a public interest organization, we believe that the American taxpayer shouldn’t have to make up for the revenue hole created by this kind of corporate misbehavior.

We strongly support the proposed rule on Treatment of Certain Interests in Corporations as Stock or Indebtedness, also known as the “earnings stripping” rule. By inhibiting multinational corporations’ ability to artificially shift profits out of their U.S. affiliates through the use of debt, this proposed action would take an important step toward putting an end to offshore tax avoidance.

Earnings stripping is an accounting gimmick used by multinational corporations to avoid taxes by shifting profits from higher- to lower-tax jurisdictions. This practice usually involves companies giving their subsidiaries in higher-tax jurisdictions (like the United States) loans from subsidiaries in low or zero tax jurisdictions (like Bermuda or Ireland). The interest payments on these loans are tax-deductible in the higher-tax country and are paid out to the subsidiary in the lower-tax country, thus allowing the company to artificially shift a substantial amount of income from the higher- to the lower-tax jurisdiction.

For a U.S.-based company, earnings stripping is nominally limited by the fact that if the company wants to repatriate its offshore profits back to the United States it will have to pay taxes on them. To escape this sensible limitation, some U.S. companies have sought to engage in inversions so that they will never have to pay taxes on any of the money shifted offshore.

Because earnings stripping is a common practice among multinational corporations, we applaud the fact that the rule applies not only to inverted companies, but to all multinationals doing business in the United States. Cracking down on all earnings stripping activities will raise much-needed revenue, and will also help level the playing field between multinational corporations that can take advantage of earnings stripping and the many smaller domestic businesses that cannot.

While curbing the abuse of earnings stripping will undoubtedly help ameliorate the problem of corporate tax avoidance and inversions, further steps can be taken. The Treasury Department should go beyond the scope of this rule to prevent “hopscotch loans,” which occur when inverted U.S. companies escape paying taxes on dividends by loaning to a foreign parent, bypassing the U.S. parent. As we’ve noted in a previous letter, Treasury should expand on its prior Notice 2014-52 by further limiting the ability of inverted firms to use these hopscotch loans and to decontrol their foreign parent companies to avoid taxation. It should do so by applying its rules to all expatriating companies, or at least to those that maintain 50 percent ownership by the original shareholders of the U.S. firm. There is no reason to link these rules to section 7874 (which sets 60 percent as the threshold) considering the broad authority the Treasury has in Section 956.

A recent study by Citizens for Tax Justice found that U.S. companies likely owe up to $695 billion in taxes on the $2.4 trillion in earnings that they stash offshore. The amount held offshore, and thus the amount these companies are avoiding in taxes, grows by hundreds of billions of dollars each year. This must end. In the absence of Congressional action to fix this problem, Treasury should take every possible step to prevent the base erosion and profit shifting created by corporate tax inversions and other corporate tax avoidance.

Thank you for your careful consideration of these comments.

Sincerely,

Robert S. McIntyre
Director of Citizens for Tax Justice

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June 30, 2016 10:21 AM | Permalink |

Read this report in PDF.

Background

Offshore profit shifting by U.S. multinational corporations is estimated to cost the federal government at least $111 billion annually in foregone corporate tax revenue.[1] In March, CTJ reported that Fortune 500 companies are holding $2.4 trillion offshore as “permanently invested” profits.[2] By shifting U.S. profits to foreign subsidiaries and declaring them to be permanently reinvested, corporations can avoid paying U.S. taxes on these earnings indefinitely. A key part of this tax avoidance strategy is shifting profits into subsidiaries in tax haven jurisdictions (countries or territories that have low or zero tax rates, such as Bermuda, the Cayman Islands, and Luxembourg) to minimize or even zero out worldwide income tax liability. Recent data from the Internal Revenue Service show that U.S. corporations report that 59 percent of their foreign income is earned in ten tax havens, even though their reported income in some countries exceeds its entire Gross Domestic Product.[3] This indicates that much of this income is being earned in the United States, but through accounting maneuvers made to appear on paper as though the company earned it in tax haven countries.

The Challenge

Currently, there is no single source that allows the public to see all of a corporation’s subsidiaries and how many of them are located in tax havens. The Securities and Exchange Commission (SEC) requires publicly traded corporations to report all of their “significant” subsidiaries in their annual financial reports. In 2014, 358 Fortune 500 companies disclosed owning at least 7,622 subsidiaries in tax haven countries. [4] However, since companies are permitted to omit subsidiaries that do not meet the SEC’s definition of “significant” (comprising at least 10 percent of the company’s total assets, investments, or income), the true number of tax haven subsidiaries is likely dramatically higher than what is reported. In fact, this report finds that companies may be omitting more than 85 percent of their total and tax haven subsidiaries in their 10-K filings.

Earlier this year, OxFam America reported that there are large discrepancies between the numbers of subsidiaries reported to the SEC and to the Federal Reserve for the four largest U.S. banking institutions.[5] Following Oxfam’s methodology, CTJ finds that 27 Fortune 500 financial companies reported 2,836 tax haven subsidiaries to the Federal Reserve while only reporting 401 to the SEC. Of the total number of tax haven subsidiaries reported to the Federal Reserve, 1,145 were located in the Cayman Islands, one of the world’s most notorious tax havens.

As a group, these 27 companies are disclosing less than 15 percent of both total subsidiaries and tax haven subsidiaries to the SEC relative to what they disclose to the Federal Reserve. Even the Federal Reserve data may understate the actual number of subsidiaries (and tax haven subsidiaries) companies have, as it too allows some exclusions in its reporting requirements. While the level of disclosure varies by company, with some disclosing similar numbers to the two regulatory bodies, there are some particularly notable offenders. 

The prominent financial companies in the table above both have large numbers of subsidiaries in tax haven jurisdictions and disclose less than 30 percent of them to the SEC. It is also worth noting that these eight companies that make extensive use of tax havens benefitted from $165 billion in taxpayer-funded bailout funds during the financial crisis.[6]

While the results of our previous Offshore Shell Games study revealed the widespread use of tax haven subsidiaries by Fortune 500 companies, the Federal Reserve data reveal that the subsidiaries listed in the SEC filings are just the tip of the iceberg.

The Need for More Disclosure

It is likely that many other multinational corporations are under-disclosing tax haven subsidiaries to the SEC, but the extent of this is unclear since more complete information is not available for the hundreds of Fortune 500 corporations that are not regulated by the Federal Reserve. If, however, the pattern for the financial companies is similar for the whole Fortune 500 list, it would mean that rather having over 7,000 tax haven subsidiaries as reported to the SEC, Fortune 500 companies may have over 50,000 tax haven subsidiaries.

Accurate reporting on tax haven subsidiaries and the amount of earnings being held is vital both to investors and to policymakers. According to a recent report from Credit Suisse, numerous major companies (such as Mattel, Xerox and General Electric) may have offshore tax liabilities that constitute more than 10 percent of their total market capitalization.[7] In other words, understanding a company’s offshore tax planning is critical to getting a complete picture of the financial status of many companies.

Now is an opportune time to take action on this issue, as the SEC already has a review process on its disclosure requirements underway.[8] Additionally, it has specifically requested comments on whether it should change the definition of a “significant” subsidiary or require companies to report all subsidiaries. CTJ recommends that the SEC should require the disclosure of all subsidiaries, regardless of size, as well as their location, relationship to the parent company, and unique Legal Entity Identifier (LEI). Such disclosure would give the public and investors alike crucial insights into the offshore finances of our nation’s largest companies. 

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[1] Kimberly A. Clausing, “Profit shifting and U.S. corporate tax policy reform,” Washington Center for Equitable Growth, May 2016. http://equitablegrowth.org/report/profit-shifting-and-u-s-corporate-tax-policy-reform/

[2] Citizens for Tax Justice, “Fortune 500 Companies Hold a Record $2.4 Trillion Offshore,” March 4, 2016. http://ctj.org/ctjreports/2016/03/fortune_500_companies_hold_a_record_24_trillion_offshore.php#.V2mR69QrKV4.

[3] Citizens for Tax Justice, “American Corporations Tell IRS the Majority of Their Offshore Profits are in 10 Tax Havens,” April 7, 2016. http://ctj.org/ctjreports/2016/04/american_corporations_tell_irs_the_majority_of_their_offshore_profits_are_in_10_tax_havens.php#.V21NZtQrKV4

[4] Citizens for Tax Justice, “Offshore Shell Games 2015,” October 5, 2015. http://ctj.org/ctjreports/2015/10/offshore_shell_games_2015.php#mostof

[5] Oxfam America, “A hidden network of hidden wealth,” January 11, 2016. http://politicsofpoverty.oxfamamerica.org/2016/01/a-hidden-network-of-hidden-wealth/

[6] ProPublica, “Bailout Recipients,” updated June 20, 2016. https://projects.propublica.org/bailout/list

[7] Credit Suisse, “Parking A-Lot Overseas: At Least $690 Billion in Cash and Over $2 Trillion in Earnings,” March 17, 2015. https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&source_id=em&document_id=1045617491&serialid=jHde13PmaivwZHRANjglDIKxoEiA4WVARdLQREk1A7g%3D

[8] Securities and Exchange Commission, “Business and Financial Disclosure Required by Regulation S-K,” Release No. 33-10064; 34-77599; File No. S7-06-16. https://www.sec.gov/rules/concept/2016/33-10064.pdf

 

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June 29, 2016 09:00 AM | Permalink |

Read this report in PDF.

A new distributional analysis of Republican Speaker of the House Paul Ryan’s “A Better Way” policies finds that the plan would:

 • Add $4 trillion to the national debt over a decade.

 • Overwhelmingly benefit the top 1 percent of tax payers while resulting in a net loss for the bottom 95 percent of taxpayers.

 • Slash corporate tax collections by at least half.

Top 1 Percent Would Enjoy Largest Tax Cuts Under the House Plan

The so-called “A Better Way” plan would reduce taxes for the top 1 percent of Americans (a group with average annual household income of $1.7 million) by an average of $137,780 per year. This massive tax reduction for the rich equals a 60 percent share of all the individual tax cuts. The top 0.1 percent of Americans would receive $798,000 a year in tax cuts or a 35 percent share of the total tax reductions.

The plan includes across-the-board tax cuts for all taxpayers, but these cuts are much smaller for middle- and low-income families, both as a share of their annual incomes and as a share of the entire value of the tax plan. For example, the middle 20 percent of Americans would receive tax cuts averaging $753 a year under the proposal (equal to 1.5 percent of income) and the poorest 20 percent would see average tax cuts of $107 a year (0.7 percent of income) compared to the top 1 percent whose average tax cut would be 8 percent of income under Ryan’s proposal.

The individual tax cuts are extremely regressive because Ryan’s plan would repeal or sharply reduce two taxes that fall exclusively or mostly on the best-off Americans — the federal estate tax and the corporate income tax — while also slashing personal income taxes on investment income such as capital gains and dividends, which mostly go to the highest earners.

Altogether, CTJ’s analysis finds that the personal income tax changes would lose $1.2 trillion, the corporate tax changes $2.5 trillion and the estate tax changes $0.3 trillion over 10 years. In other words, the corporate tax cuts make up the bulk of the plan’s tax breaks.

By themselves, the tax cut figures do not show the full regressive effects of the proposed tax changes. Ryan has proposed large reductions in federal programs to offset the cost of the tax reductions. When the impact of these program cuts is considered, only the richest 5 percent of Americans would end up better off. All other income groups would be net losers under the plan.

 

Modeling Issues

While much of the Ryan tax program is straightforward to analyze, two parts are problematic or unclear.

International taxation issue

The Ryan plan appears to propose a 20 percent tariff on goods and services imported into the United States and a tax exemption (or 20 percent tax credit) for goods and services exported to foreign countries. Although Ryan briefly argues that this scheme would not violate U.S. treaties with other countries, we do not agree.

In making the case for his tariff and rebate proposal, Ryan suggests that his business tax is similar to a value-added tax (a.k.a. a national sales tax). But while there are some similarities, it is decidedly not a VAT. It might better be characterized as a value-added tax with a deduction for value added. That’s because, unlike typical VATs, Ryan’s plan would allow a tax deduction for wages (the source of most value added).

In 2005, a tax panel set up by then-President George W. Bush made a similar proposal but concluded that it was unlikely to pass muster and excluded it from its analysis of its own plan. The panel’s report states: “given the uncertainty over whether border adjustments would be allowable under current trade rules, and the possibility of challenge from our trading partners, the Panel chose not to include any revenue that would be raised through border adjustments.” Most tax experts would agree that the plan would not pass muster.

Thus, we have not scored the effects of Ryan’s tariff and rebate proposal for either revenue or distributional purposes. Had we done so, the revenue loss from the plan would be greater, and the distributional effects of the plan would be even more regressive.

Business taxes on pass-through entities

It’s unclear whether Ryan intends to apply his 20 percent corporate tax to pass-through entities such as sole proprietorships, partnerships and Subchapter S corporations. He never explicitly says he would do so, but he does say that such entities would be required to pay their owner-operators an estimated “reasonable” salary, which would be deductible at the entity level. (This would be somewhat like the current treatment of Subchapter S corporations for payroll tax purposes.) If Ryan’s 20 percent corporate tax rate would apply to the remainder of pass-through income, then the cost of the plan would probably be higher, and the distributional effects would be even more regressive.

Appendix: Proposed Policy Changes in the House GOP Plan

• Consolidate the current seven personal income tax brackets into three brackets with a top rate of 33 percent.
• Lower the current preferential tax rates on capital gains and dividends by providing a 50 percent exclusion for capital gains, dividends and interest income.
• Eliminate itemized deductions, with the exception of charitable deductions and the mortgage interest deduction, while increasing standard deduction to $24,000 for married couples.
• Cap personal income tax rates on the “active income” of pass-through businesses at 25 percent.
• Repeal personal and dependent exemptions, while increasing the current $1,000 per child tax credit from $1,000 to $1,500 and allowing a new nonrefundable $500 tax credit for dependents not eligible for the current child tax credit.
• Eliminate the estate tax, the 3.8 percent Medicare tax on very high earners’ investment income and earned income.
• Eliminate the alternative minimum tax.
• Sharply reduce the corporate tax rate from 35 to 20 percent.
• Introduce a “territorial” corporate tax system which would exempt corporate income reported in other countries.
• Allow immediate tax write-offs for all business investments (except land).
• Eliminate the deductibility of net business interest payments (except for financial companies).

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June 24, 2016 11:40 AM | Permalink |

CTJ on Speaker Ryan’s Tax Plan:  Tax Cuts for Corporations and the Wealthy Never Have and Will Not Deliver on Promises of Economic Growth

(Washington, D.C.) Following is a statement by Bob McIntyre, director of Citizens for Tax Justice, regarding the release of House Speaker Paul Ryan’s tax reform blueprint.

“With rising income inequality, substantial deficits and lack of adequate revenue to fund public services, the nation should not be engaging in policy discussions about major tax cuts, especially cuts that primarily benefit the wealthy and corporations. But here we are—again. Speaker Ryan’s latest tax reform blueprint proposes to gut the progressivity and adequacy of our federal tax code via enormous cuts in top tax rates, multiple new tax breaks and corporate tax changes.

“Speaker Ryan proposes a major giveaway to corporations, cutting the statutory corporate income tax rate from 35 percent to 20 percent. At the same time, his plan would decimate the corporate tax base by exempting foreign profits from taxation and allowing the full expensing of capital investments. Even with the limited base-broadening measures Ryan proposes, it is likely that his plan will allow corporations to pay trillions less in taxes in the years to come.

“On the individual side, Speaker Ryan’s plan takes aim at the most progressive features of the tax code. First, he proposes to eliminate the estate tax, which only the richest of the rich, two of every 1,000 wealthy estates (0.2 percent) pays. In addition, Ryan plans to cut the top capital gains tax rate from 25 percent to 16.5 percent, which means an enormous windfall for the top 1 percent who enjoy about two-thirds of all capital gains income. Finally, Ryan would eliminate the alternative minimum tax, a measure that has long helped to ensure the wealthiest Americans pay at least a minimal tax rate.

“The only way that Speaker Ryan could possibly pay for such a costly, regressive plan is to double downby enacting draconian cuts to critical programs for middle- and low-income families.”

 

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June 9, 2016 09:14 AM | Permalink |

Tech Companies, Big Banks Worst Offenders When It Comes to Writing off Executive Compensation to Avoid Billions in Taxes

New Report Finds 315 Fortune 500 Companies Used “Stock Option Loophole” to Collectively Avoid $64.5 Billion in State and Federal Taxes

From 2011 to 2015, the executive stock option loophole enabled Fortune 500 companies to lavish their executives with salary in the form of stock and later write off the compensation to reduce their tax bills by, in some cases, billions, a new report released today by Citizens for Tax Justice found.

CTJ analysts reviewed financial filings and found that 315 Fortune 500 firms collectively avoided $64.6 billion in federal and state taxes over five years using the executive stock option loophole. Annually, they dodge an average $13 billion. The five biggest offenders are the most recognizable tech companies and financial firms: Facebook, Apple, Google, Goldman Sachs and J P Morgan Chase.

“This loophole means taxpayers are essentially underwriting lavish executive compensation,” said Robert McIntyre, executive director of CTJ. “Corporations in some cases give executives millions in stock options and then they ask taxpayers to help pick up the tab by taking tax deductions.”

Most big corporations give their executives benefits in the form of allowing them to buy the company’s stock at a favorable price in the future. When employees exercise these “executive stock options,” corporations can take a tax deduction for the difference between what the employees pay for the stock and what it is worth, even though it costs them nothing to issue the options.

Report Highlights:

• 315 corporations reduced their federal and state corporate income taxes by a combined total of $64.6 billion over the last five years by using the excess stock option tax break.
• In 2015, the tax break cut Fortune 500 income taxes by $14.8 billion.
• Just 25 companies received half of the total excess stock option tax benefits accruing to Fortune 500 corporations over the past five years.
• Facebook and Apple received about 9 percent and 7 percent of the total excess stock option tax benefits during this period, enjoying $5.7 and $4.7 billion in stock option tax breaks respectively over the past five years.
• Financial giants, JP Morgan, Goldman Sachs and Wells Fargo collectively received about 8 percent of the total.
• Over the past five years, Facebook slashed its federal and state income taxes by 70 percent using this single tax break.

To read the full report, go to: http://ctj.org/ctjreports/2016/06/fortune_500_corporations_used_stock_option_loophole_to_avoid_646_billion_over_the_past_five_years.php

 

 

 

 

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June 9, 2016 09:00 AM | Permalink |

Apple & Facebook Biggest Beneficiaries

Read this report in PDF.

One of the most egregious loopholes in the tax code, known as the stock option loophole, allows companies to deduct millions or billions from their taxable income for compensating executives in the form of stock options. Corporations can take these deductions even though granting stock options costs them nothing. CTJ has reviewed five years of corporate filings and found this loophole has allowed companies to annually avoid an average $13 billion in taxes. It should be noted that the average sum corporations are avoiding could be understated because not all corporations report information about stock options.

This report sheds light on how corporations are able to provide sizable compensation to their CEOs and other executives and concurrently use tax code loopholes to reduce their tax bill. It presents data for 315 Fortune 500 corporations that disclose a portion of the tax benefits they receive from this tax break.

HIGHLIGHTS:

# 315 corporations reduced their federal and state corporate income taxes by a combined total of $64.6 billion over the last five years by using the excess stock option tax break.

# In 2015, the tax break cut Fortune 500 income taxes by $14.8 billion.

# Just 25 companies received half of the total excess stock option tax benefits accruing to Fortune 500 corporations over the past five years.

# Facebook and Apple received about 9 percent and 7 percent of the total excess stock option tax benefits during this period, enjoying $5.7 and $4.7 billion in stock option tax breaks respectively over the past five years. Financial giants, JP Morgan, Goldman Sachs and Wells Fargo collectively received about 8 percent of the total.

# Over the past five years, Facebook slashed its federal and state income taxes by 70 percent using this single tax break.

How It Works: Companies Deduct Costs They Don’t Incur

Most big corpora­tions give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When employees exercise these options, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (employees report this difference as taxable wages).

Before 2006, companies could deduct the “cost” of the stock options on their tax returns, reducing their taxable profits as reported to the IRS, but didn’t have to reduce the profits they reported to their shareholders in the same way, creating a big gap between “book” and “tax” income. Some observers, including CTJ, argued that the most sensible way to resolve this would be to deny companies any tax deduction for an alleged cost that doesn’t require a cash outlay, and to require the same treatment for shareholder reporting purposes.

But instead, rules in place since 2006 maintained the tax write-off, but now require companies to lower their “book” profits to take account of options. But the book write-offs are usually much less than what the companies take as tax deductions. This is because the oddly-designed rules require the value of the stock options for book purposes to be calculated — or guessed at — when the options are issued, while the tax deductions reflect the actual value when the options are exercised. Because companies typically low-ball the estimated values, they usually end up with much bigger tax write-offs than the amounts they deduct as a “cost” in computing the profits they report to shareholders.

Reforming the Excess Stock Option Tax Break

Despite the changes that took effect in 2006, the stock option tax break continues to reduce the effectiveness of the corporate income tax. A February 2014 CTJ report assessing taxes paid by Fortune 500 corporations consistently profitable from 2008 through 2012 identified the excess stock option tax break as a major reason for the low effective tax rates paid by many of the nation’s biggest companies.[i]

In recent years, some members of Congress have taken aim at this tax break. For example, former Michigan Senator Carl Levin (D-MI) introduced the “Cut Unjustified Loopholes Act,” which includes a provision requiring companies to treat stock options the same for both book and tax purposes, as well as making stock option compensation subject to the $1 million cap on corporate tax deductions for top executives’ pay. The stock option loophole essentially allows profitable corporations to underwrite executive compensation on average taxpayers’ dime. Executives are able to cash out when their stock becomes more valuable, and corporations are able to deduct an imaginary cost.

During a time when the nation is failing to raise enough revenue to adequately fund its priorities, lawmakers should move to close the stock option loophole to make the tax system fairer and raise much-needed revenue.

The appendix includes the full list of 315 corporations and the size of their reported federal and state tax break for excess stock options in the five-year period between 2011 and 2015.

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[i] Citizens for Tax Justice, The Sorry State of Corporate Taxes, February 25, 2014. http://ctj.org/corporatetaxdodgers/

 

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June 8, 2016 12:58 PM | Permalink |

Raise Revenue, Enhance Fairness, Stop Corporate Tax Avoidance

Read the report as a PDF.

There is widespread agreement in Congress and among the American people that the U.S. tax system needs reform. Yet some proposed federal tax changes defy what most Americans would consider reform. This policy brief outlines three sensible, broad objectives for meaningful federal tax reform and discusses specific policies that can help achieve these objectives.

1. Tax Reform Should Raise Revenue

The most basic task of any tax system is to raise enough revenue to fund needed public investment, but the federal tax system has consistently failed to achieve this minimal goal. In 35 of the past 40 years, the federal government has failed to collect enough tax revenue to pay for all federal spending, so in each of these years the nation has run a budget deficit. These continual deficits are not driven by federal spending growth. In fact, in fiscal year 2014, federal spending as a percentage of the nation’s Gross Domestic Product was lower than in any year of Ronald Reagan’s presidency. In the past five years alone, discretionary spending has fallen by almost a third as a share of the economy.[i]

The nation’s deficits are primarily the product of our persistently low federal tax revenues. In each of the past four years, federal revenues have been lower as a share of the economy than at any time since the early 1970s.[ii] As a result, U.S. tax collections are well below those of most other nations. In 2013, the most recent year for which complete data are available, the U.S. collected less tax revenue as a percentage of its economy than did any other economically developed country besides Chile, Korea and Mexico.[iii]

Budget deficits can, of course, be eliminated through a mix of revenue increases and spending cuts. But the main driver in the nation’s ongoing budget deficits is declining federal tax revenues, driven by sweeping tax cuts enacted more than a decade ago. Thus, a sensible, primary goal of comprehensive tax reform should be to raise federal revenues substantially above their currently depressed level.

Revenue-raising reforms must strengthen our tax system in both the short run and the long term. Unfortunately, some current congressional proposals emphasize raising revenue in the short run at the expense of sustainable long-term tax revenue. For example, proposals to enact a “tax holiday” for trillions of dollars in cash that American corporations are currently holding offshore would provide a small short-term revenue boost, but it would mean forgoing a much larger long-term revenue stream if these companies paid their fair share of the corporate tax when they eventually repatriate these profits. [iv]

A sensible litmus test for any proposed revenue-raising plan is whether it would help provide sustainable long-term tax revenue or undercut this goal.

2. Tax reform should not exacerbate income inequality

Fairness is in the eye of the beholder, but Americans generally agree that a fair tax system should not tax poor people further into poverty. Contrary to the “skin in the game” rhetoric used by some presidential candidates, Americans at all income levels pay a substantial share of their income to support public services.

In fact, the poorest 20 percent of Americans will pay, on average, 19.3 percent of their income in federal, state and local taxes in 2016. The average annual income in this group is about $15,100, so even families living significantly below the federal poverty threshold pay a significant percentage of their income in taxes.

Mitigating poverty and creating conditions in which more citizens can participate and contribute to our nation’s economy is a necessary social policy goal. Requiring the poorest Americans to spend a fifth of their income on taxes is tantamount to making the poor poorer. For this reason, a minimal goal of revenue-raising federal tax reform should be to avoid increasing taxes on the most vulnerable Americans beyond their current level.

At the other end of the economic spectrum, our tax code contains special carve outs that allow the wealthiest Americans to avoid paying their fair share. For example, the tax code treats income derived from wealth more favorably than income derived from work. The top tax rate on capital gains income is 23.8 percent, well below the 39.6 percent top tax rate on salaries and wages. Two-thirds of all capital gains are enjoyed by the top 1 percent of Americans.[v] More so than virtually any other feature of the tax code, the capital gains tax break exacerbates widening economic inequality in our nation.

In spite of these inequities, the federal tax system helps offset the regressive nature of state tax systems, all of which take a greater share of income from their lowest-income residents than from their wealthiest residents. The share of total taxes paid by each income group is roughly equal to the share of total income received by that group. For example, the poorest 20 percent of taxpayers will pay only 2.1 percent of total taxes this year, which is roughly on par with their share (3.3 percent) of total income this year. Meanwhile, the richest 1 percent of Americans will pay 23.6 percent of total taxes and receive 21.6 percent of total income in 2016.[vi] In other words, the nation’s collective tax system is relatively flat or proportional rather than progressive.

Tax reform should avoid pushing low-income working families further into poverty and make the very wealthiest Americans pay their fair share. Policies such as preserving and expanding targeted tax credits such as the Earned Income Tax Credit and the Child Tax Credit would reward work and help low-income families make ends meet. And taxing capital gains and dividends in the same way that salaries and wages are taxed would raise some revenue, add fairness and progressivity to the tax code as well as ease widening income inequality.

3. Tax reform should close corporate tax loopholes and ensure corporations pay their fair share

Fortune 500 corporations are aggressively seeking to avoid all income tax liability, lobbying intensely for new tax breaks while simultaneously engaging in an aggressive effort to shift their U.S. profits into low-rate foreign tax havens.

Some of the biggest Fortune 500 corporations find ways to shelter their U.S. income from taxes altogether. A 2014 CTJ/ITEP report found that 111 Fortune 500 companies were able to avoid all federal income taxes in at least one profitable year between 2008 and 2012,[vii] and a companion report found a similar pattern at the state level.[viii] In many cases, these zero-tax corporations are simply claiming generous tax breaks that have been enacted by Congress (at the behest of corporate lobbyists) over the years. All too often, these tax provisions lavish huge tax cuts on the most profitable corporations while offering little to smaller businesses with less lobbying clout.

Paring back tax breaks for accelerated depreciation, research and development and manufacturers could help achieve a level playing field for businesses of all sizes.

Many of the same big multinational corporations are aggressively seeking to avoid taxes by claiming, for tax purposes, that their U.S. profits are earned in offshore tax havens.

This widespread income-shifting stems largely from an arcane feature of the U.S. corporate tax law: American multinational corporations are allowed to “defer” paying U.S. taxes owed on the profits of their offshore subsidiary companies until those profits are officially brought to the U.S.

Deferral encourages American corporations to shift profits overseas. By using accounting gimmicks, they can make their domestic profits appear to be generated by subsidiary companies in countries with very low or no corporate taxes.

The most straightforward policy solution to stop this sham is to end deferral. This would mean that all the profits of American corporations are subject to the U.S. corporate income tax whether they are domestic profits or foreign profits generated by offshore subsidiaries. This change would eliminate the incentive for an American corporation to move its operations offshore or to make its U.S. profits appear to be generated in an offshore tax haven.

Putting it All Together

Our tax system chronically underfunds public investments the American people collectively support and want—and does so in a way that pushes low-income families further into poverty while allowing huge corporations and the wealthy to avoid paying their fair share. True tax reform should raise revenue in the short run, to help meet the country’s pressing budgetary needs, while simultaneously creating a sustainable long-term revenue stream to meet tomorrow’s needs. Tax reform should also avoid making inequality and poverty greater problems than they already are. Each of these goals can be achieved by closing unwarranted loopholes for capital gains and offshore corporate profits, while preserving and expanding valuable low-income tax credits.

 

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[i] Office of Management and Budget, Historical Tables, October 20, 2015. https://www.whitehouse.gov/omb/budget/Historicals

[ii] Ibid.

[iii] Citizens for Tax Justice, The U.S. Is One of the Least Taxed Developed Countries, April 7, 2016. http://ctj.org/ctjreports/2016/04/the_us_is_one_of_the_least_taxed_developed_countries_1.php

[iv] Citizens for Tax Justice, $2.1 Trillion in Corporate Profits Held Offshore: A Comparison of International Tax Proposals, July 14, 2015 http://ctj.org/ctjreports/2015/07/21_trillion_in_corporate_profits_held_offshore_a_comparison_of_international_tax_proposals.php

[v] Citizens for Tax Justice, Ending the Capital Gains Tax Preference would Improve Fairness, Raise Revenue and Simplify the Tax Code, September 20, 2012. http://ctj.org/ctjreports/2012/09/ending_the_capital_gains_tax_preference_would_improve_fairness_raise_revenue_and_simplify_the_tax_co.php

[vi] Citizens for Tax Justice, Who Pays Taxes in America in 2016?, April 12, 2016. http://ctj.org/ctjreports/taxday2016.pdf.

[vii] Citizens for Tax Justice, The Sorry State of Corporate Taxes, February, 25, 2014. http://www.ctj.org/corporatetaxdodgers/

[viii] Citizens for Tax Justice, 90 Reasons We Need State Corporate Tax Reform, March 19, 2014. http://ctj.org/90reasons/

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May 16, 2016 02:50 PM | Permalink |

Three Reasons to Reject the Dividends Paid Deduction and Corporation Integration

Read this report in PDF.

Since the beginning of this year, Senate Finance Chairman Orrin Hatch has been working on a proposal to “integrate” corporate and shareholder level taxes into what he calls a single level of taxation. While Sen. Hatch has yet to release a specific proposal, the Senate Finance Committee is holding a hearing on May 17 that will examine the possibility of achieving corporate integration by allowing corporations to deduct the payment of dividends to shareholders and, thus, sharply reduce their corporate income taxes.

Here are three of the biggest problems with this idea:

First, allowing dividends to be deductible at the corporate level would not lead to a single level of taxation on corporate dividend distributions. Instead, it would make most profits distributed as dividends tax-exempt at any level. Second, there is ample justification for a separate entity-level tax on corporate income. Third, at a time in which the country faces a lack of adequate revenue for public investments, corporate integration would result in a massive revenue loss from one of the country’s most progressive revenue sources.

1. Exempting corporate dividends from taxation would leave a large swath of income untaxed.

According to the most recent data from the Commerce Department’s Bureau of Economic Analysis and the Internal Revenue Service, $3.3 trillion in corporate stock dividends were paid to individuals over the nine years from 2004 through 2012 (excluding dividends from non-taxable S corporations). But less than $1.2 trillion in such dividends were reported on individual tax returns as “qualified” dividends.[1] The rest were not taxed, because they were paid to tax-exempt pension plans, other retirement plans, and other tax-exempt entities. That means that almost two-thirds of personal dividend income from corporate stock was not subject to individual income taxes.

If dividends become deductible at the corporate level, then two-thirds of dividend income would go untaxed at both the corporate and individual level. In other words, rather than eliminate supposed “double” taxation, a dividend deduction would primarily lead to zero taxation.

2. The corporate income tax is justified by the special treatment of corporations.

One of the arguments made for corporate integration is that the combination of the corporate tax and shareholder level taxes represent a form of double taxation because taxing a corporation is in effect just another tax on shareholders. While a corporation is not a person, the special privileges that corporate entities receive require that they also take responsibility as corporate citizens, which means, among other things, paying taxes.

From a legal perspective, corporations are treated as separate legal entities, which are entitled to many of the same rights as individuals. Most famously, the Supreme Court set the precedent, in Santa Clara County v. Southern Pacific Railroad, that corporations are persons for the purpose of the 14th Amendment.[2] More recently, the Supreme Court reinforced this logic in Citizens United v. Federal Election Commission, by ruling that corporations have essentially the same First Amendment rights as individuals.[3]

From an economic perspective, what distinguishes corporations that are subject to the corporate tax from those that are not is that they are given the privilege to be publicly owned, traded on a mass scale and that their owners are granted limited liability. Being granted these privileges allows them to raise large amounts of capital and play an outsized role in American economic life. In fact, corporations that are currently subject (at least in theory) to the corporate tax have 62 percent of total business receipts in the United States.[4]

Taken together, the substantial economic advantages and constitutionally granted rights given to corporations mean that they have the responsibility to support the government that grants them these very significant benefits. The public understands this principle: one recent poll found that 65 percent of Americans believe that corporations should pay more, not less, taxes.[5]

It also important to note that the existing corporate tax allows many corporations to get away with paying relatively low tax rates, with many corporations paying nothing in taxes year after year. A study by CTJ of Fortune 500 companies found that their average tax rate was just 19.4 percent or just over half the statutory corporate tax rate of 35 percent.[6]

Some advocates of corporate integration have argued that corporate integration is needed to stop the alleged erosion of the corporate tax base due to more businesses being incorporated as pass-through entities to avoid corporate taxes.[7] A better approach would be to tighten the definition of pass-through entities by lowering the number of shareholders a pass-through entity is allowed to have and by setting an income threshold over which the corporate tax will apply to pass-through entities.

3. Corporate integration is an unaffordable tax cut that would make our tax system substantially more regressive.

Despite far too many loopholes, the corporate tax is still a vital and progressive revenue source. The Congressional Budget Office (CBO) estimates that the federal government will collect $357 billion in corporate tax revenues in 2017 and about $4 trillion over the next decade.[8] Corporate taxes have fallen from more than a third of total federal taxes in earlier decades to just a tenth in recent years.[9] Considering our government’s need for more tax revenue to reduce the deficit and fund essential programs, corporations should be paying more, not less, in taxes.[10]

In addition to providing significant revenues, the corporate tax increases the fairness of our tax system, because it is one of the most progressive forms of taxation. Virtually all analysts conclude that most, if not all, of the corporate tax is ultimately borne by shareholders.[11] As a result, about half of the corporate tax is paid by the wealthiest 1 percent of taxpayers, and nearly three-quarters is paid by the top 5 percent.[12]

Enacting a corporate dividends deduction could mean the loss of roughly $150 billion in corporate tax revenue each year. Even if some of that cost is offset by taxing personal dividends at regular tax rates rather than at the preferential capital gains tax rates, the fact most dividends are not taxed at the personal level would still leave a very large cost. Every dollar lost in corporate revenue is likely to be made up for either through the loss of revenue for important public investments or through higher taxes on low- and middle income families. Low- and middle-income families are already struggling due to growing income inequality and government austerity. Substantially cutting one of the most progressive sources of revenue would make our tax system less fair.

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[1] IRS Statistics of Income for qualified dividends reported on individual tax returns. Bureau of Economic Analysis, FAQ_318_Scorp for total corporate dividends paid (excluding Sub S dividends).

[2] John Witt, “What Is The Basis For Corporate Personhood?” October 24, 2011. http://www.npr.org/2011/10/24/141663195/what-is-the-basis-for-corporate-personhood

[3] Lyle Denniston, “Analysis: The personhood of corporations,” January 21st, 2010. http://www.scotusblog.com/2010/01/analysis-the-personhood-of-corporations 

[4] IRS, “SOI Tax Stats – Integrated Business Data: Table 1: Selected financial data on businesses,” April 15, 2015. https://www.irs.gov/uac/SOI-Tax-Stats-Integrated-Business-Data

[5] Americans for Tax Fairness, “Polling on Tax Fairness Issues,” March 19, 2015. http://www.americansfortaxfairness.org/files/3.19.15-ATF-Polling-Questions-on-Tax-Fairness-Issues-Final.pdf

[6] Citizens for Tax Justice, “Sorry State of Corporate Taxes,” February 4, 2015. http://www.ctj.org/corporatetaxdodgers/

[7] Tax Foundation, “Eliminating Double Taxation through Corporate Integration.” February 13, 2015. http://taxfoundation.org/article/eliminating-double-taxation-through-corporate-integration

[8] Congressional Budget Office, “Updated Budget Projections: Fiscal Years 2016 to 2026,” March 4, 2016. https://www.cbo.gov/publication/51384

[9] Office of Management and Budget: “Table 2.2—Percentage Composition of Receipts by Source: 1934–2018”, http://www.whitehouse.gov/omb/budget/Historicals

[10] Citizens for Tax Justice, “U.S. Corporations Should Pay More, Not Less, in Taxes,” November 7, 2012. https://ctj.sfo2.digitaloceanspaces.com/pdf/corporatetaxfactsheet.pdf

[11] Congressional Budget Office, “Working Paper 2010-03: Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis.” May 20, 2010, http://www.cbo.gov/publication/21486

[12] Institute on Taxation and Economic Policy Tax Model, April 2013

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April 26, 2016 11:04 AM | Permalink |

For Immediate Release: Tuesday, April 26, 2016
Contact: Jenice R. Robinson, 202.299.1066 X29, Jenice@ctj.org

Following is a statement by Bob McIntyre, director of Citizens for Tax Justice, regarding the Senate Finance Committee’s hearing today on business tax reform. 

“For many years, the tax committees in Congress have refused to address the egregious and expensive loopholes that allow so many big profitable corporations to avoid their tax responsibilities. Instead, they have insisted that nothing can be done except in the context of a complete overhaul of the corporate income tax code.

“Rather than having yet another hearing on big-picture business tax reform, Congress should instead act immediately to close these unwarranted loopholes.

“By failing to close corporate loopholes, Congress is complicit in Fortune 500 companies avoiding up to $695 billion in taxes on $2.4 trillion in profits these companies hold offshore. If members had the will, Congress could shut down offshore corporate tax avoidance tomorrow by ending the ability of companies to indefinitely defer paying taxes on U.S. profits that they have shifted into offshore tax havens.

“Similarly, it is outrageous that Congress has repeatedly failed pass legislation to close the inversion loophole, a failure that has allowed a growing number of major U.S. corporations to pretend to be foreign to avoid U.S. taxes.

“Unfortunately, many in Congress who claim to support ‘business tax reform’ are seeking to expand tax loopholes for corporations and cut their taxes even further than existing loopholes already allow. These tax-deform efforts should be rejected. Real business tax reform should raise substantially more revenue, in large part by putting an end to rampant offshore tax avoidance.”

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April 14, 2016 01:41 PM | Permalink |

Findings from Citizens for Tax Justice’s Recent Reports

Read this report in PDF.

1. The nation’s tax system is barely progressive.

■A new CTJ analysis shows that the total share of taxes (federal, state, and local) that will be paid by Americans across the economic spectrum in 2016 is roughly equal to their total share of income. 

■While some taxes(e.g. the federal income tax) are progressive, others such as state and local sales taxes take a larger share of income from low-income families than from higher-income families.

■In 2016, the richest 1 percent of Americans will pay 23.6 percent of all federal, state and local taxes in America, but they will also capture 21.6 percent of total income.

 

2. The U.S. statutory corporate income tax rate is 35 percent, but many companies pay at a much lower rate.

■ CTJ identified 15 corporations that, as a group, paid no federal income taxes on $21 billion of U.S. income in 2015, and avoided income taxes on $93 billion of profits over the past five years. 

These companies span a wide array of industries, and rely on a diverse set of tax breaks to achieve these low rates. Manufacturing tax deductions, executive stock option tax breaks, accelerated depreciation and the research tax credit are each important factors allowing these companies to pay a lower tax rate than most middle-income families face.

■ CTJ’s comprehensive 2014 study of consistently profitable Fortune 500 corporations found that between 2008 and 2012 they paid 19.4 percent of their profits in federal income taxes — far lower than the official 35 percent statutory rate.

 

3. Taxes in the United States are well below those of most developed nations.

■ Taxes accounted for 25.7 percent of the nation’s GDP in 2014, well below the OECD average and lower than all but three (Chile, Korea, and Mexico) other OECD member nations. Moreover, U.S. corporate taxes are below the OECD average as a share of GDP.

■ The countries collecting more in taxes as a share of their economy than the U.S. include many of our most prominent trade partners and competitors, such as France, Germany, the United Kingdom and Canada.

 

4. U.S. multinational corporations are aggressively shifting their profits into low-rate foreign tax havens.

■ A CTJ analysis shows that even as large corporations find ways to avoid paying tax on their U.S. income, many of the same companies are shifting their profits into foreign tax havens such as Bermuda and the Cayman Islands that have little or no corporate tax. U.S. multinationals report that almost 60 percent of their subsidiaries’ foreign profits are being “earned” in just 10 tiny tax haven countries.

■ U.S.-based multinational companies report that they are earning profits in these tax havens on a ludicrous scale: For example, these corporations claimed they earned $104 billion in Bermuda in 2012 — a sum that is 18 times bigger than Bermuda’s entire economic output of $6 billion in that year.

■ American multinational corporations are also continuing to aggressively declare that their foreign profits are “permanently reinvested” abroad, a designation that allows them to avoid paying even a dime of U.S. income tax until these profits are “repatriated” to the United States. A CTJ report shows that at the end of 2015, Fortune 500 corporations disclosed a total of $2.4 trillion in offshore profits, on which these companies may be avoiding as much as $695 billion in U.S. income taxes.

 

5. Various presidential candidates are proposing huge tax cuts that would paradoxically make most Americans worse off.

■ A CTJ analysis of the large tax cuts proposed by three Republican presidential candidates shows that each would cut federal revenues by at least $9 trillion over the next decade, exacerbating our nation’s already precarious fiscal situation.

■ The same analysis shows that the poorest 80 percent of Americans would ultimately be worse off under each of these tax plans because the programmatic spending cuts and eventual tax increases that these plans would likely require would negate the initial benefit of the tax cuts proposed by each candidate. 

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