Tag: Archive

June 10, 1998 03:47 PM | Permalink |

It’s one of life’s little annoyances, at least for the majority of adults who are married. The couple next door, with exactly the same income as you and your spouse, pays less in taxes than you do. Your neighbors may be retirees living on Social Security and other things that are taxed much more lightly than your wages. Or they may get more of their income from tax-preferred investments on which income tax rates are considerably lower and payroll taxes are nonexistent. Or they may have a bigger mortgage than you or be more generous to charity.

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May 21, 1998 02:27 PM | Permalink |

With much fanfare, the U.S. Senate recently passed its Internal Revenue Service overhaul bill. After discussions with the House, a version of the legislation will undoubtably become law soon. The Senate vote was 97-0, with no one willing to go on record against the cynical Republican IRS bashing that produced the bill. Even President Clinton, whose Treasury Department remains deeply concerned about several of the bill’s provisions, has become a cheerleader.

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January 23, 1998 02:41 PM | Permalink |

By Robert S. McIntyre

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Washington

Suppose a bunch of rich people want to promote a national sales tax to replace the Federal income tax. How do they try to persuade the public to support such a plan? Simple: play with the arithmetic.

Earlier this month, the well-financed group Americans for Fair Taxation, based in Texas, kicked off a sales-tax campaign with a full-page advertisement in several large newspapers. It called for replacing all the main Federal taxes–personal and corporate income taxes, payroll taxes and the estate tax–with a 23 percent national retail sales tax.

According to the group, such a plan would raise exactly as much money as current laws do, while cutting taxes for just about everyone. The group’s plan has been implicitly endorsed by Representative Bill Archer, a Republican from Texas, the chairman of the tax-writing House Ways and Means Committee and a longtime sales-tax fan and income-tax hater.

I was curious about how the group did its arithmetic, so I checked out its Web site–www.fairtax.org–and sent a note to the E-mail address to get further information about the group’s calculations.

According to the group’s figures, at 1995 levels a new sales tax would have to raise $1.36 trillion to replace all Federal income taxes, payroll taxes and estate and gift taxes. Under its plan, the group says, taxable spending would be $4.6 trillion (after accounting for rebates to partly protect lower-income families).So, $1.36 trillion divided by $4.6 trillion would be the required sales tax rate. Fine, except that $1.36 trillion divided by $4.6 trillion is not 23 percent. It’s about 30 percent.

It turns out that the group’s purported 23 percent tax rate is misleading and hypothetical. It came up with that number by dividing the sales tax by the cost of a purchase plus the tax. So if the tax on a $100 purchase is $30, the group prefers to call it a 23 percent “tax inclusive rate” ($30 divided by $130). Ever hear of computing a sales tax like that?

The fact that the group’s sales tax, even by its own figures, entails a 30 percent tax rate is only the beginning of the math problems. The group’s backup materials also assert that almost a third of its projected sales-tax revenue is supposed to come from taxes the Government will pay to itself. Build a road, pay yourself a tax. Buy some planes for the Air Force, pay yourself some more. And so on.

Unfortunately, that shell game won’t work. Without these phantom governmental tax payments, the sales tax rate would have to jump to 42 percent to break even.

A bit more digging reveals that a quarter of the remaining sales taxes are supposed to be paid on things like church services, free care at veterans hospitals and a variety of hard-to-tax financial services like free checking accounts. If we discount the taxes on these items, the sales tax rate would have to climb to an astronomical 56 percent to break even.

Apparently, the millions of dollars that Americans for Fair Taxation says it has spent on focus groups and polling have taught it an important lesson: giving people the real facts about a national sales tax is politically disastrous for its proponents. So the group is trying the only other available route: cooking the numbers.

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January 15, 1998 03:56 PM | Permalink |

The “Tax on Marriage”

Should we get rid of it, and, if so, how?

by Michael J. and Robert S. McIntyre

First published in People & Taxes, May 1980
Updated January 1998

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September 12, 1997 02:29 PM | Permalink |

Two years ago, Republicans in Congress tried to let lobbyists for big polluters rewrite environmental laws behind closed doors. Not surprisingly, many people were appalled. But now Republican leaders are back with a similar notion for the Internal Revenue Service. They want to put corporate special interests in charge of the nation’s tax-collecting agency.

In other words, they want the foxes to run the henhouse.

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August 18, 1997 09:39 AM | Permalink |

(Read the PDF)

Overview: The 1997 Tax Act was a disaster for the goal of fair, simple and adequate taxation. Among its defects:

• Almost half the tax cuts provided by the legislation will go to the best-off 5 percent of taxpayers. In contrast, taxpayers in the lowest 40% of the income scale will get nothing.
• The cost of the high-income tax cuts is far larger than the “official” estimates. Although the tax cuts are officially estimated to cost $95 billion over five years and $275 billion over ten years, the real 10-year cost is likely to exceed $400 billion. That makes the “balanced budget” the 1997 legislation is supposed to achieve in 2002 highly unlikely–and in subsequent years, things only get worse. As a result, the 1997 tax act will make it even more difficult to balance the federal budget in the future without further cuts in important programs.
• Then there are all the wasteful tax shelters that the 1997 tax act is likely to spawn. New capital gains tax loopholes and corporate tax breaks will inspire lawyers and accountants to invent a new generation of tax avoidance schemes for their clients. These are likely to spur tax-motivated, economically foolish investments at the expense of good ones.
• Even some of the more benign aspects of the act, notably the new $500 child credit, were drafted so as to make tax filing far more complicated for many millions of average taxpaying families.

A decade ago, public anger over rampant corporate and high-income tax avoidance spurred a Republican President, a Democratic House of Representatives and a Republican Senate to work together to produce the Tax Reform Act of 1986. While not perfect, that legislation gave us a federal income tax code with relatively few loopholes and, as a consequence, relatively low tax rates (excessively low, one might say, since they were insufficient to pay for public spending).

Unfortunately, Republican House Speaker Newt Gingrich and Democratic President Bill Clinton have never concealed their disdain for the achievements of 1986. Gingrich helped lead an almost successful fight in the House to defeat the ’86 reform act, while Clinton has publicly stated that he thinks the 1986 reforms “went too far.” Indeed, Clinton’s June 1993 description of his 1993 deficit-reducing upper-income tax increase aptly sums up his tax philosophy: “We raised tax rates, but we tried to find ways for people who’ve been successful, who have money, to lower their taxes.”

“Find[ing] ways for people . . . who have money to lower their taxes” was the central theme of the 1997 tax act, and on this issue Clinton and Gingrich are apparently soul mates–Gingrich, unabashedly, and Clinton, in practice if not always in rhetoric. Only a few weeks before the 1997 act was finally approved, Clinton promised that he would never sign anything like the unfair, budget-busting tax bills then pending in Congress. Sadly, that promise turned out to be an empty one.

1. Capital Gains: The bill provides a bewildering array of new tax rates on profits from selling stocks, bonds, investment real estate and other “capital assets.” Depending on the type of assets sold and how long they were owned, taxpayers will choose among six different capital gains tax rate schedules. These include:

• Short-term gains (assets held for a year or less), which are taxed at regular rates.
• Mid-term gains (assets held for more than a year but not more than 18 months, plus gains from selling collectibles held for more than a year), which are taxed at the lesser of regular tax rates or 28%.
• Long-term gains (assets held for more than 18 months, excluding collectibles), which are generally taxed at 20%, except that taxpayers in the 15% regular tax bracket pay a 10% capital gains tax on these gains.(1)
• 5-year gains (assets acquired after December 31, 2000 and held for more than 5 years), which are taxed at 18%, or 8% for taxpayers in the 15% regular tax bracket.
• “Risky” gains (investments in original issues of stock in certain businesses held for more than 5 years). Half of these gains are excluded from income and the included portion is taxed as mid-term gain. This produces a top tax rate of 14%, with a 7.5% rate for taxpayers in the 15% regular tax bracket.
• Pay-back of excessive real estate depreciation deductions. Real-estate investors who take depreciation deductions that exceed the actual decline in a building’s value (as is commonly the case) will pay a 25% capital gains tax on these excess deductions when they sell the building. For top-bracket taxpayers, this means a “recapture” rate of only about 63 cents for each dollar in tax savings from the excess deductions.

Typically, top-bracket individual taxpayers (who have most of the capital gains) will get the equivalent of about a 50% capital gains exclusion (an 18% or 20% capital gains tax rate instead of the regular 39.6% tax rate). The effective percentage exclusion gradually declines to about 33% for less well-off taxpayers.

Ignoring any increased asset sales or likely new tax shelters, the capital gains tax cuts will cut revenues by about $87 billion over the fiscal 1997-2002 period, and by about $201 billion over the 1997-2007 period.

According to the “official” congressional figures, however, the capital gains tax cuts will raise $0.1 billion over the 1997-2002 period! In addition, Congress’s figures show a ten-year, fiscal 1997-2007 cost from the capital gains tax cuts of only $21.2 billion.

The $180 billion difference between Congress’s ten-year capital gains cost figures and the apparent ten-year revenue loss reflects the fact that Congress’s figures assume a $1.2 trillion increase in capital gains realizations in response to the tax cuts–an increase of about 40% compared to expected realizations under prior law! Such an increase would be unprecedented based on the historical record.

2. New Corporate Loopholes: The bill offers an array of new corporate tax breaks (offset in part by some loophole-closing measures). The largest new loophole is elimination of most of the corporate Alternative Minimum Tax, which up until now has served to assure that large, profitable corporations pay at least some federal income tax.(2) Overall, the 1997 tax act reduces corporate income taxes by a net of about $6 billion a year, with the lion’s share of that amount reflecting the gutting of the corporate minimum tax. Heretofore, the minimum tax had discouraged many companies from bothering to seek out tax dodges, but now the sky’s the limit.

3. Child Credits: The bill offers a $500, unindexed tax credit ($400 in 1998) for children age 16 or under. While this credit will be quite valuable to families that qualify, only about 57 percent of all dependent children will be eligible for even a partial credit. This reflects the fact that the credit will not be available to most lower-income families because it can only be used to offset income taxes, but generally not payroll taxes, which are the main federal tax paid by less well-off families.(3) In addition, the credit will be gradually phased out above $110,000 in income for couples (above $75,000 for single parents).

The child credits are expected to cost $85 billion over five years and $183.4 billion over ten years. Because the dollar amounts of the child credit and its phase-outs are not indexed, its annual cost declines by about 2% a year after it becomes fully effective in 1999.

The rules for computing the new child credit are extremely complex, and will apparently require many millions of families to fill out the complicated Alternative Minimum Tax form (even though they do not owe that tax). The congressional report on the 1997 tax act plaintively states that Congress “anticipate[s] that the Secretary of the Treasury will determine whether a simplified method of calculating the child credit, consistent with the formula [in the statute], can be achieved.”

4. Education Tax Credits: Families would be allowed a non-refundable tax credit equal to 100% of the first $1,000 in college expenses and 50% of the next $1,000, for each of the first two years of college per child, for a maximum credit of $1,500 a year. For later years of college or graduate school, a 20% tax credit is allowed for the first $5,000 in expenses (rising to $10,000 in expenses after 2002). Starting in 2002, all the dollar amounts except the maximum expenses for the 20% credit are indexed for inflation.

The education credits would generally be unavailable to lower-income families. In theory, the credit would also be phased out between $80,000 and $100,000 in income for couples ($40,000 to $50,000 for others), but many well-off families will find it easy to get around these limits by shifting income to their children. The credits are estimated to cost $31.6 billion over five years, and $76 billion over ten years (with little growth thereafter).

5. Tax-Free Investment Income:

A. Education savings accounts: Families with the means to do so would be allowed to set up education savings accounts and contribute up to $500 a year to them. Accumulated earnings would be tax-free if used to pay school expenses (elementary, secondary, college and graduate school). Eligibility to make such contributions is phased out between $160,000 and $170,000 for couples (and between $95,000 and $110,000 for others).

B. Expanded retirement savings accounts: Better-off taxpayers now ineligible for Individual Retirement Accounts because they have employer-paid pension plans would be allowed to set up either deductible IRAS or a new kind of “Backloaded IRA.”

• The income phase-out range for deductible IRAs would be gradually increased from the current $40,000-50,000 for couples ($25,000-35,000 for singles) to $80,000-100,000 for couples ($50,000-60,000 for singles).
• In the case of backloaded IRAs, contributions to the accounts (up to $2,000 a year for singles and $4,000 for couples) would not be tax-deductible, but the income earned on the money invested would be permanently tax-exempt if held until retirement. Eligibility for these accounts would be phased out between $150,000 and $160,000 for couples and $95,000 to $110,000 for singles.

These new investment-income tax breaks are officially estimated to cost $7.1 billion over the first five years, and to cost $30.6 billion over the following five years. The cost will continue to grow rapidly (by 13% a year) thereafter.

6. Estate Taxes: The $600,000 estate tax exemption would be gradually increased to $1 million (over 9 years). For estates consisting mainly of family-owned businesses, the exemption would rise to $1.3 million starting in 1998. There would be a number of other revenue-losing changes in estate taxes. When fully phased in, the estate tax cuts will slash taxes by more than $10 billion annually on the 2% of estates big enough to be subject to estate taxes.

7. Excise Taxes: The expiring excise tax on airline tickets would be made permanent (with modifications). The cigarette tax would be increased from 24-cents per pack to 34 cents in 2000 and 2001, and to 39 cents in 2002 and thereafter (an increase of 63%). There also would be a number of other, smaller excise tax changes. The total excise tax hike is estimated to be $39.5 billion over five years and $98.9 billion over ten years.

Notes: In general, proposals were analyzed using the Institute on Taxation & Economic Policy Microsimulation Tax Model. Estimates for proposed estate tax reductions are based on Joint Committee on Taxation, “Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens,” 1993. Estimates for the education tax credits and savings accounts (ESAs) are estimates based on the proposed statutory rules, distribution of college-age children, college attendance rates, etc.. Child credits, education tax credits, and excise taxes are shown as the average amounts over the next five years, at 1997 levels. Other provisions are shown fully effective at 1997 levels.

Citizens for Tax Justice, August 18, 1997

 

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February 17, 1997 05:41 PM | Permalink |

From The Nation, February 17, 1997

 

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If anything resurrected Bill Clinton after the 1994 elections and kept him in the White House past 1996, it was his joining with congressional Democrats in criticizing GOP plans to slash Medicare in order to pay for “a big tax cut for the rich.” The charge had resonance because it was pretty much true. That is, Republicans did propose a package that would have sharply reduced Medicare spending compared to projected outlays under current law. And they coupled their Medicare reductions with a large tax cut of roughly equal dollar magnitude.

But why was that tax cut characterized–correctly–as “for the rich”? Certainly, the most talked about item, the $500-per-child tax credit, hardly deserved that epithet. Stupid? Pandering? A reckless squandering of scarce public resources? Maybe. But the child credit was not primarily “for the rich.” Eighty percent of its tax reductions were for families making less than $75,000. Indeed, Democrats, led by President Clinton, had a similar child-credit proposal–albeit one with a lower age cut-off and with phase-outs that denied any benefit at all to better-off families.

No, the real GOP “tax cut for the rich” was the proposed halving of the capital gains tax. Almost three-quarters of this hugely expensive tax cut was targeted to families making more than $100,000 (with the lion’s share of that going to those making $200,000 or more).

Senate Republicans have reintroduced their capital gains tax cut plan, as the $237 billion centerpiece of a $615 billion tax cut proposal (over 10 years) that also includes expanded IRAs for upper-income people, sharp cuts in estate taxes on very large inheritances and, last and least, a $500-per-child tax credit.

Presumably, the President is still squeamish about what he called “a big tax cut for people who don’t need it.” So why has he been dropping hints left and right over the past few weeks that he “can envision being more flexible on capital gains,” and adding “I’ve never been philosophically opposed, as some of my fellow Democrats are”?

Does the President simply fail to understand that the Republicans’ capital gains tax cut is an abatement for the rich? If so, there are plenty of people in his Treasury Department who can set him straight. A more likely source of the President’s wavering on capital gains, however, is that he hates to be “philosophically opposed” to much of anything that anyone really wants. He feels the pain of wealthy stock traders, just as he empathizes with the poor and downtrodden. But he’s also smart enough to understand that programs he cares about a lot more than capital gains tax cuts are in danger if the government doesn’t have the revenues to pay for them.

Nevertheless, the President has recently held out the possibility that he might give the Republicans their cherished capital gains tax cut if they’ll support his Dick-Morris-inspired college tuition tax subsidies. That’s a pretty odd bargain. The tuition deduction plan, which offers to pay 15 percent of the tuition bills of families making up to about $50,000 and 28 percent for better-off families (making up to a little over $100,000 a year), looks exactly like the kind of upside-down subsidy that Republicans generally tend to love–and that if, say, George Bush had proposed it, Democrats would deplore. Talk about a lose-lose deal from the point of view of good policy. Win-win would be if the parties agreed to drop both plans.

Of course, Clinton may think he can scheme with congressional Republicans to jigger the revenue estimates on the capital gains tax cut to make it look much smaller than it really is. Already, the congressional Joint Committee on Taxation has optimistically pegged the cost of the Senate capital gains tax cut at only about half its likely loss–albeit a still hefty $129 billion over ten years. If assumptions about increased asset sales are made even more rosy, phase-ins are adjusted and everything past the first five years is ignored, then the apparent cost of a capital gains tax cut can be made to appear quite small in the short run. But cooking the books can only affect short-term perception. It won’t affect the huge negative impact that a capital gains tax cut will have on both long-term revenues and tax fairness.

Bill Clinton may not care about squandering one of the only issues that’s worked for Democrats over the past two years, but he does profess to believe in the value of government programs and has been talking a lot lately about his place in history.

So he should keep in mind that even under current law, the federal government is scheduled to go to hell in a handbasket. Spending on so-called “discretionary programs”–everything from defense, to environmental protection to roads–is already slated to fall by a quarter, as a share of the economy, by fiscal 2002. Current congressional sentiment to avoid further defense cuts is likely to mean that the rest of core government will have to be squeezed even more. Add big tax cuts on top of all this, and Bill Clinton won’t leave much government behind to his successors. That’s hardly Mount Rushmore material.

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September 19, 1996 04:36 PM | Permalink |

By all accounts, 1995 was a very good year for American business. According to the Commerce Department, corporate pretax profits jumped by 14 percent in 1995–to a record $600.8 billion.(1) Yet despite strong profits and a growing economy, American corporations laid off more than 400,000 workers during 1995. An additional 230,350 layoffs were announced in the first five months of 1996–a 34 percent increase over the same period last year.(2) Public anxiety over the latest surge in corporate downsizing has spurred loud expressions of professed concern from elected officials and candidates.

Government policy, however, is not acting to curb corporate downsizing. On the contrary, a Citizens for Tax Justice analysis of the annual reports of ten of the largest downsizing corporations finds that these companies receive huge federal subsidies, implemented through the tax system. Unfortunately, the 104th Congress has not only failed to close the tax breaks that reward these downsizing companies. It has also proposed and passed several provisions that would expand the loopholes most often used by these companies to avoid taxes.

 

THE “LAYOFF TEN”:
A SUMMARY

Citizens for Tax Justice has analyzed the annual reports of ten of America’s largest companies that have engaged in large-scale layoffs over the past three years. We found that while these companies were laying off workers, they were taking advantage of billions of dollars in tax subsidies and boosting the already high salaries of their top corporate executives.

• Together, these ten companies announced or implemented layoffs of 134,450 workers over the 1993-95 period.

   

• At the same, the ten companies received $8.3 billion in federal tax subsidies, tax breaks that drove their effective tax rates far below the 35 percent tax rate that large, profitable companies are supposed to pay.

   

• While average workers for downsizing corporations face sacrifices, the CEOs of these companies have enjoyed significant salary increases, in many cases as a direct result of the large-scale layoffs they have imposed. In fact, these ten companies rewarded their CEO’s with compensation packages averaging $5.2 million in 1995.

In fact, it appears to be almost a general rule that CEOs for companies that laid off workers have done the best for themselves in terms of pay. In 1995, average CEO salaries and bonuses jumped by 18 percent to $1.7 million.(3) But Business Week found that the CEOs of the 20 companies with the largest announced layoffs last year saw their salaries and bonuses jump by 25 percent.
 

CONGRESSIONAL ACTION–AND INACTION

Responding to growing anxiety over the latest round of corporate downsizing, politicians and candidates have denounced corporate welfare and promised protection for workers. In fact, however, the 104th Congress has done little to address the problem. Instead, it has maintained–and even proposed to enlarge–the tax subsidies that downsizing companies enjoy.

For starters, the 104th Congress has simply failed to close many of the existing tax loopholes enjoyed by profitable, downsizing corporations. For example:

• Corporate mergers and acquisitions frequently lead to plant closings and layoffs. Yet the interest on the debt used to finance these mergers is tax-deductible, providing an effective subsidy for corporate raiding.

   

• The tax code’s complex rules for taxing multinational corporations fail to make these companies pay their fair share in taxes, and can even encourage multinational corporations to move jobs overseas.

   

• While there are some supposed limits on the deductibility of “excessive” salaries for corporate executives, those limits do not apply to so-called “performance based” compensation. This rule allows corporations to deduct in full compensation linked to stock performance. Downsizing has been one potential way to boost stock prices. In fact, the ten companies analyzed in this study experienced a 54 percent average increase in their stock prices between 1992 and 1995.

   

• Finally, Congress has yet to touch a myriad of industry-specific loopholes that benefit oil, gas and timber companies, insurance companies, banks. These subsidies increase the profitability of the largest, most politically influential corporations regardless of their performance or their treatment of their workers.

In addition, the majority in Congress has actually voted to expand the tax breaks enjoyed by many of the companies examined in this study. For example, the “Contract with America Tax Relief Act” (H.R. 1215), which passed the House of Representatives on April 5, 1995, provided huge corporate tax cuts, many of which directly benefit companies that have been downsizing.

• The bill contained a huge cut in the capital gains tax rate, which can encourage corporations and shareholders to engage in short term speculation rather than long-term investments in workers and equipment.

   

• The bill also contained a so-called “neutral cost recovery” system of depreciation, designed to allow companies to take total deductions on the purchase of equipment that are considerably greater than the actual cost of the equipment. Combined with other tax breaks, companies could use this break to produce negative marginal tax rates–allowing corporations to exploit loopholes to make a profit off of the tax system.

   

• Finally, the bill repealed the Alternative Minimum Tax, which serves as a “backstop” to prevent corporations and individuals from using loopholes to avoid paying taxes altogether. Repeal of the AMT would allow many highly profitable corporations to become “corporate freeloaders”–paying little or no taxes.

The “Contract With America Tax Relief Act” passed the House of Representatives, but never was brought to a vote in the Senate. But the 1996 Budget Reconciliation Bill (H.R. 2491) contained many similar or identical tax break provisions, including a big cut in capital gains taxes and a sharp reduction in the Alternative Minimum Tax. That bill also increased taxes on 7.7 million working households with 6.8 million children by cutting the Earned Income Tax Credit, and encouraged corporations to raid their workers’ pension funds by eliminating tax penalties on such withdrawals. These provisions passed both the House and Senate, but were dropped from the final budget after the President’s veto.

 

THE LARGEST CURRENT & PROPOSED CORPORATE TAX BREAKS (4)

Accelerated Depreciation: Accelerated depreciation allows corporations to deduct the cost of equipment and buildings faster than they wear out. This break results in corporations avoiding taxation on huge amounts of profits. In 1995, for example, accelerated depreciation allowed Eastman Kodak to avoid $124 million taxes and Allied Signal to avoid $51 million. Corporations can combine accelerated depreciation with interest deductions to yield negative tax rates–making equipment investments yield higher profits after taxes than before taxes. Accelerated depreciation write-offs cost the Treasury about $39 billion per year.

Attacks on the Alternative Minimum Tax: The current corporate Alternative Minimum Tax was enacted after it was discovered that some companies were able to take advantage of tax breaks like accelerated depreciation to avoid paying income taxes altogether. In fact, between 1981 and 1986, half of a sample of 250 of America’s largest, most profitable corporations managed to have at least one entirely tax-free year. Examples include Allied Signal, with an effective tax rate of -16.3 percent between 1982 and 1985,(5) Mobil and Scott Paper (which was later acquired by Kimberly-Clark).

The AMT requires companies to pay at least some income tax no matter how many loopholes they may find in the regular corporate tax code. The “Contact With America Tax Relief Act” would have repealed the minimum tax entirely. That would once again have allowed many profitable companies to pay no federal taxes whatsoever.

Capital Gains Tax Breaks: Gains on the sale of appreciated assets like real estate or stock, get a special, lower top tax rate under the personal income tax, but for corporations, realized capital gains are currently taxed the same as other kinds of profits. The congressional tax plans proposed to cut both the individual and the corporate capital gains tax rates–with the latter tax break extended to ordinary profits for timber and certain other industries.

Multinational Corporations: A number of tax-sheltering strategies are available to multinational corporations to avoid paying U.S. taxes on their profits. Among other things, companies can to “defer” taxes on the profits of their overseas subsidiaries and use complex “transfer pricing” schemes to shift profits (on paper) out of the U.S. In some cases, these rules actually encourage corporations to move jobs to foreign tax havens. Tax avoidance strategies of this sort cost the federal Treasury tens of billions of dollars a year.

Industry-Specific Tax Subsidies: Besides being able to take advantage of the above loopholes, certain industries have their own, industry-specific tax subsidies. The oil, gas and energy industries, for example, will get $22 billion in special tax breaks over the next seven years. These include immediate write-offs for “intangible” exploration and development investments as well as percentage depletion allowances that simply exempt a percentage of profits from tax. Timber, mineral, and agriculture industries also benefit from billions in targeted tax subsidies.

 

THE LAYOFF TEN: A DETAILED LOOK

AT&T

AT&T announced the largest and most publicized recent layoffs. The company, which made $20.8 billion in pretax profits between 1993 and 1995, announced in January 1996 that it would cut 40,000 jobs over the next three years–with 18,000 of that from “involuntary” layoffs. Meanwhile, AT&T’s CEO, Robert Allen, received $3.3 million in direct salary and compensation and bonuses. Allen directly benefitted from the layoffs, as AT&T’s share price increased $21/8 the day of the layoff announcement. This increased the value of Allen’s stock options by $3.4 million, and the value of his total compensation package to $5.2 million.

Between 1993 and 1995, AT&T received $3.1 billion in federal tax subsidies. In 1995 alone, the company received tax breaks totaling $1.6 billion, the majority from accelerated depreciation. Over the three-year period, AT&T paid an effective tax rate of just 19.9 percent.

 

KIMBERLY-CLARK

On December 13, 1995, Kimberly-Clark announced that it would cut 6,000 jobs by the end of 1997, on top of 12,000 layoffs announced in 1994 by its subsidiary Scott Paper (acquired in 1994). Meanwhile, over the 1993-95 period, the company received a total of $197 million in tax subsidies.

Wayne Sanders, Kimberly Clark’s Chairman and CEO, received salary and bonuses amounting to $1.6 million, a 44 percent increase from 1994. In addition, the value of Sanders’s stock options in the company rose by an estimated $884,000 after the company announced its latest round of layoffs.

 

BANKAMERICA

In October 1993, BankAmerica announced that it was cutting 3,750 jobs, on top of the 12,000 it had eliminated in 1992. Meanwhile, BankAmerica’s U.S. profits jumped from $2.5 billion in 1993 to $3.7 billion in 1995. The company paid just 21.3 percent of its $9.0 billion in pretax U.S. profits in federal taxes in 1993-95, receiving $1.2 billion in tax subsidies.

Richard Rosenberg, BankAmerica’s Chairman, President, and CEO, was one of the 20 highest paid Chief Executives in the country during 1995. Rosenberg’s salary and bonus totaled $4.5 million–a 45 percent increase over his 1994 salary. Rosenberg’s long-term compensation package added an additional $7.3 million, bringing his total 1995 compensation to $11.9 million. Rosenberg resigned at the end of 1995.

 

EASTMAN KODAK

Eastman Kodak, the maker of Kodak film and cameras, employed about 96,600 workers worldwide at the end of 1995. In August 1993, Eastman Kodak announced it was cutting 10,000 jobs by the end of 1995. It announced an additional 4,000 layoffs in December 1994. From 1993 to 1995, Eastman Kodak recorded $3.0 billion in pretax U.S. profits. Meanwhile Eastman Kodak received $189 million in tax subsidies, mostly in the form of accelerated depreciation. Eastman Kodak’s effective tax rate for 1995 was only 17.3 percent, and its three-year tax rate was well below the 35 percent statutory corporate tax rate.

Kodak’s Chairman, President and CEO, George M.C. Fischer, received salary and bonuses of $4.3 million in salary and bonuses during 1995, a 10 percent increase from 1994. In addition, Fischer received almost $7 million in a long-term compensation package, including forgiveness of a $2 million loan.

 

AMOCO

Amoco, one of the country’s largest oil companies, announced in July 1994 that it planned to eliminate 3,800 positions by the end of 1995 and 700 more jobs by the end of 1996. The company also announced the elimination of 8,500 jobs in 1992, bringing the combined total layoffs to 13,000 jobs–roughly one quarter of Amoco’s work force.

Between 1993 and 1995, Amoco reported $4.9 billion in pretax U.S. profits, but paid an effective income tax rate of just 15.9 percent. Tax subsidies to Amoco over this period amounted to $938 million. In 1995 alone, the company claimed $179 million in tax credits and $71 million in other tax breaks. Amoco’s CEO, H. Laurance Fuller, meanwhile, was paid $1.6 million in 1995.

 

PROCTER & GAMBLE

Proctor & Gamble is one the largest manufacturers and distributors of consumer goods in the world, specializing in laundry and paper products. Since 1993, Procter & Gamble has announced layoffs totaling 13,000 jobs–approximately 12 percent of its 1993 workforce. Over the same period of time, Procter & Gamble recorded pretax U.S. profits of $6.1 billion. Procter & Gamble received a total of $194 million in tax subsidies over the three-year period.

Procter & Gamble’s chairman, Edwin L. Artzt, was paid $2.9 million in salary and bonuses–a 26 percent raise over 1994. He also received $1.1 million in long-term compensation. Artzt retired from the company in July 1995.

 

AMERICAN HOME PRODUCTS

American Home Products is one of the top three companies in prescription drug sales and is a leading manufacturer of pharmaceuticals and medical supplies. It markets products such as Advil, Anacin, Dristan, ChapStick and Chef Boyardee canned foods. American Home Products is also a major pesticide manufacturer. In 1994, it acquired American Cyanamid, another major pharmaceutical company for approximately $9.6 billion.

At the end of 1994, American Home employed 74,000 workers. But the combination of layoffs announced in July and November of 1994 and January 1995 meant that American Home eliminated a total of 8,600 of those positions in 1995.

Over the past three years, American Home received $720 million in federal tax subsidies. These included, among other things, tax breaks for operating in Puerto Rico and foreign tax havens, accelerated depreciation tax breaks, and research tax credits. American Home earned $5.1 billion in pretax U.S. profits over the 1993-95 period, but its effective tax rate was only 21 percent.

American Home’s CEO, John Stafford enjoyed a total compensation package in 1995 of $5 million, including $2.4 million in salary and bonuses, $2.2 million in exercised stock options and $300,000 in long-term pay. He also benefitted from a jump in the company’s stock value following the January 1995 layoffs.

 

MOBIL

Mobil Oil Company has announced 6,000 layoffs since May 1, 1995, just one week before it announced a large jump in first-quarter profits. In fact, during 1995, Mobil’s U.S. pretax profits totaled $1.8 billion–almost four times the amount it earned in 1994. Over the three-year period 1993-95, Mobil received $434 million in tax subsidies.

Mobil’s CEO, Lucio Noto, received $1.6 million in salary and bonuses during 1995, a 16 percent raise over 1994. Noto also received another $1.5 million in long-term compensation, for a total of $3 million in 1995. Noto did extremely well as a direct result of the layoffs. Immediately after the layoffs were announced, Mobil stock jumped $37/8, increasing the value of options held by Noto by an estimated $24 million.

 

ALLIED SIGNAL

Allied Signal produces parts for military aircraft and missiles, as well as automobile parts, plastics and fibers. During 1994, Allied Signal reported almost $1.9 billion in sales to the federal government, including $1.3 billion in defense contracts or subcontracts. The company employed approximately 87,500 employees in 1994.

On October 27, 1995, Allied Signal announced that it would lay off 3,100 workers. A short time later, Allied Signal announced record third-quarter profits.

Over the past three years, Allied Signal received $665 million in federal tax subsidies while reporting $2.8 billion in pretax U.S. profits. The company paid an effective tax rate over these three years of just 11.2 percent–less than a third the statutory corporate tax rate. In 1995 alone, the company got $51 million in accelerated depreciation tax breaks, $19 million in foreign sales corporation credits, and close to $200 million in other special tax breaks.

Allied Signal’s CEO, Lawrence Bossidy, received $4.4 million in 1995 in salary and bonus, a 20 percent increase from 1994. In addition, the increased value of Bossidy’s stock options and incentives increased his total pay to an estimated $8.4 million.(6) Bossidy’s compensation package was boosted considerably when, on the day Allied Signal announced its layoffs, its stock price jumped by $2 per share, increasing the total value of Bossidy’s stock options by $5.1 million.(7)

 

MCI

MCI Communications Corporation announced last year that it would trim its workforce by 3,000 jobs–more than 7 percent of its total workforce. Meanwhile, the company recorded $874 million in pretax U.S. profits during 1995, bringing its total for the past three years to $3.2 billion. Over that same three years, the company received $585 million in tax subsidies, cutting its effective tax rate to only 16.5 percent.

MCI’s Chairman and CEO, Bert Roberts Jr., was paid $2.2 million in salary and bonuses, a 33 percent raise from 1994. MCI’s stock increased by $1.80 immediately after the layoffs were announced, pushing the value of Roberts’ options up by an estimated $756,000.

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More Detailed Tables …

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1. U.S. Dept. of Commerce, Bureau of Economic Analysis, Survey of Current Business, April 1995, Table 1.14, p. 15.

2. Challenger, Grey & Christmas, June 1996.

3. “How High can CEO Pay Go?” Business Week, April 22, 1996. By comparison, the average factory workers’ salary increased jut 1 percent last year. The average professional workers’s salary increased by 4.2 percent.

4. For a more extensive look at these and other related “tax expenditures” enjoyed by both individuals and corporations, see the CTJ’s The Hidden Entitlements (May 1996).

5. A negative tax rate indicates that rather than paying taxes, a corporation was able to use excess deductions to get a refund for taxes paid in earlier years.

6. CEO Compensation from “The Business Week Executive Compensation Scorecard,” Business Week, April 22, 1996, p.107

7. Information on CEO stock options from “CEO’s Win, Workers Lose,” Institute for Policy Studies, April 24, 1996.

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August 26, 1996 12:47 PM | Permalink |

For Immediate Release,
Monday, August 26, 1996

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Citizens for Tax Justice today released final estimates of the cost and distribution of GOP presidential candidate Bob Dole’s 1996 campaign tax plan. The analysis finds that the Dole plan would add $132 billion a year to the federal budget deficit when fully phased in (in 1996 dollars). By comparison, the deficit for fiscal 1996 is estimated to be about $120 billion.

CTJ’s analysis also found that:
• The richest one percent of all families would save an average of $29,000 a year in taxes under the Dole plan (and would get 27% of the total tax cuts).
• In contrast, the typical taxpayer would get a tax reduction of only $330. That’s far less than the reductions in federal programs necessary to offset the cost of the tax-cut plan, which would average about $1,100 per family.
• 8.9 million low- and moderate-income working families would face tax increases averaging $270 each under the Dole plan, due to its proposed reductions in the earned-income tax credit.
• Three-quarters of the proposed Dole tax cuts would go to the best-off 20% of all families.
• The bottom three-fifths of all families would get less than 7% of Dole’s total proposed tax cuts.

 

CTJ analyzed the Dole plan using the Institute on Taxation & Economic Policy’s Microsimulation Tax Model. The ITEP model is similar in scope and methodology to computer tax models used by the congressional Joint Committee on Taxation and the U.S. Treasury Department. For purposes of the analysis, the term “families” encompasses all taxpaying units, including married couples, single parents and individuals.

CTJ’s analysis includes: Dole’s proposed 15% across-the-board reduction in personal income tax rates, his proposed capital gains tax reduction (to a maximum rate of 14%), his proposed reduction in taxation of Social Security benefits at higher income levels (back to pre-1993 rules), his proposed expansion of Individual Retirement Accounts (including education accounts), his proposed reductions in the earned-income tax credit for low- and moderate-income working families (patterned after the congressional proposal vetoed last year) and Dole’s proposed $500-per-child credit. The last item is phased out between $75,000 and $110,000 in adjusted gross income, and according to the Dole campaign will generally be unavailable to low- and moderate-income working families receiving the earned-income tax credit (contrary to a previous Dole campaign assertion that the credit would be for “low- and middle-income families”).

CTJ’s final estimates of the cost and distribution of the Dole plan is slightly different from preliminary estimates released on August 5 because of subsequent revelations by the Dole campaign about the earned-income tax credit reductions and limits on the per-child credit.

CTJ’s estimated cost of the Dole plan does not include a $25-40 billion a year spending proposal that would allow taxpayers to designate that up to $250 of their taxes ($500 for couples) be sent to a qualifying charitable organization or organizations. The Dole campaign has not included the cost of this spending proposal in its budget figures.

 

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Detailed Tables on the 1996 Dole Tax Plan

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July 23, 1996 04:37 PM | Permalink |

July 23, 1996

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Citizens for Tax Justice strongly supports legislation to limit current federal tax deferrals that subsidize the export of American jobs. Such reform legislation is embodied in S. 1355, Senator Byron Dorgan’s “American Jobs and Manufacturing Preservation Act.” Similar legislation has been approved by the House of Representative in the past. We urge the full Congress to pass S. 1355 and send it to the President to sign.

Tax Breaks for Exporting Jobs Should Be Eliminated–We Shouldn’t Pay Our Companies to Make Goods for the American Market in Foreign Countries

In its 1990 annual report, the Hewlett-Packard company noted: “As a result of certain employment and capital investment actions undertaken by the company, income from manufacturing activities in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes, for years through 2002.” In fact, said Hewlett-Packard’s report, “the income tax benefits attributable to the tax status of these subsidiaries are estimated to be $116 million, $88 million and $57 million for 1990, 1989 and 1988, respectively.”

This is not an isolated instance. An examination of 1990 corporate annual reports that we undertook a few years ago provided the following additional examples:(1)

• Baxter International noted that it has “manufacturing operations outside the U.S. which benefit from reductions in local tax rates under tax incentives that will continue at least through 1997.” Baxter said that its tax savings from these (and its Puerto Rican) operations totaled $200 million from 1988 to 1990.(2)
• Pfizer reported that the “[e]ffects of partially tax-exempt operations in Puerto Rico and reduced rates in Ireland” amounted to $125 million in tax savings in 1990, $106 million in 1989 and $95 million in 1988.
• Schering-Plough said that it “has subsidiaries in Puerto Rico and Ireland that manufacture products for distribution to both domestic and foreign markets. These subsidiaries operate under tax exemption grants and other incentives that expire at various dates through 2018.”
• Becton Dickinson reported $43 million in “tax reductions related to tax holidays in various countries” from 1988 to 1990.
• Beckman noted: “Certain income of subsidiaries operating in Puerto Rico and Ireland is taxed at substantially lower income tax rates,” worth more than $7 million a year to the company over the past two years.
• Abbott Laboratories pegged the value of “tax incentive grants related to subsidiaries in Puerto Rico and Ireland” at $82 million in 1990, $79 million in 1989 and $76 million in 1988.
• Merck & Co. noted that “earnings from manufacturing operations in Ireland [were] exempt from Irish taxes. The tax exemption expired in 1990; thereafter, Irish earnings will be taxed at an incentive rate of 10%.”

In fact, under current law, American companies often are taxed considerably less if they move their manufacturing operations to an overseas “tax haven” such as Singapore, Ireland or Taiwan, and then import their products back into the United States for sale.

How we subsidize the export of American jobs

The tax incentive for exporting American jobs results from current tax rules that:

1. allow companies to “defer” indefinitely U.S. taxes on unrepatriated profits earned by their foreign subsidiaries; and

2. allow companies to use foreign tax credits generated by taxes paid to non-tax-haven countries to offset the U.S. tax otherwise due on repatriated profits earned in low- or no-tax foreign tax havens.

S. 1355 would end this wrong-headed subsidy

Why should the United States tax code give companies a tax incentive to establish jobs and plants in tax-haven countries, rather than keeping or expanding their plants and jobs in the United States? Why should our tax code make tax breaks a factor in decisions by American companies about where to make the products they sell in the United States?

Why indeed? We believe that this tax break for overseas plants should be ended. Profits earned by American-owned companies from sales in the United States should be taxed–whether the products are Made in the USA or abroad.

S. 1355 would end the current tax break for exporting jobs–by taxing profits on goods that are manufactured by American companies in foreign tax havens and imported back into the United States. It would achieve this result by (1) imposing current tax on the “imported property income” of foreign subsidiaries of U.S. corporations; and (2) adding a new separate foreign tax credit limitation for imported property income earned by U.S. companies, either directly or through foreign subsidiaries.(3)

Legislation identical to S. 1355 was passed by the House in 1987. Unfortunately, at that time the reform provision was dropped in conference at the insistence of the Reagan administration.

Spurious arguments against curbing subsidies for exporting jobs

Of course, Congress has heard loud complaints from lobbyists for companies that benefit from the current tax breaks for exporting jobs. Some have apparently argued that their companies will be at a competitive disadvantage in foreign markets if this legislation were approved. But since the bill applies only to sales in U.S. markets, that argument makes no sense.

Lobbyists also have asserted that if American multinationals have to pay U.S. taxes on their profits from U.S. sales of foreign-made goods, they might be disadvantaged compared to foreign-owned companies selling products in the United States. Perhaps. But as the House concluded in 1987, it would be far better “to place U.S.-owned foreign enterprises who produce for the U.S. market on a par with similar or competing U.S. enterprises” rather than worrying about “placing them on a par with purely foreign enterprises.”(4)

Finally, lobbyists have made the spurious point that overall, foreign affiliates of U.S. companies have a negative trade balance with the United States, that is, they move more goods and services out of the United States than they export back in. To which, one might answer, so what?

After all, S. 1355 does not deal with all foreign affiliates of U.S. companies. Rather, it deals only with U.S.-controlled foreign subsidiaries that produce goods for the American market in tax-haven countries.(5) When U.S. companies shift what would otherwise be domestic production to these foreign subsidiaries it most certainly does not improve the U.S. trade balance; it hurts it.(6)

Conclusion

American companies may move jobs and plants to foreign locations in order to make goods for the U.S. market for many reasons–such as low wages or lack of regulation–that the tax code can do little about. But we should not provide an additional inducement for such American-job-losing moves through our income tax policy.

American multinationals should pay income taxes on their U.S.-related profits from foreign production. Such income should not be more favorably treated by our tax code than profits from producing goods here in the United States. We urge Congress to approve the provisions of S. 1355.

1. Several of the companies mentioned here apparently have been lobbying hard against S. 1355.

2. Many companies do not separate the tax savings from their Puerto Rican and foreign tax-haven activities in their annual reports.

3. “Imported property income means income . . . derived in connection with manufacturing, producing, growing, or extracting imported property; the sale, exchange, or other disposition of imported property; or the lease, rental, or licensing of imported property. For the purpose of the foreign tax credit limitation, income that is both imported property income and U.S. source income is treated as U.S. source income. Foreign taxes on that U.S. source imported property income are eligible for crediting against the U.S. tax on foreign source import[ed] property income. Imported property does not include any foreign oil and gas extraction income or any foreign oil-related income.

“The bill defines ‘imported property’ as property which is imported into the United States by the controlled foreign corporation or a related person.” House Committee on Ways and Means, “Report on Title X of the Omnibus Budget Reconciliation Act of 1987,” in House Committee on the Budget, Omnibus Budget Reconciliation Act of 1987, House Rpt. 100-391, 100th Cong., 1st Sess., Oct. 26, 1987, pp. 1103-04.

4. Id.

5 Companies that manufacture abroad in non-tax-haven countries generally would not be affected by the bill, since they still will get foreign tax credits for the foreign taxes they pay.

6. Foreign affiliates of U.S. companies that produce goods for foreign markets–not addressed by Senator Dorgan’s bill–may well have a negative trade balance with the United States, insofar as they transfer property from their domestic parent to be used in overseas manufacturing. But it would obviously be far better for the U.S. trade balance–and for American jobs–if those final products were manufactured completely in the United States and exported abroad, rather than having much of the manufacturing process occur overseas. To assert that foreign manufacturing operations by American companies helps the U.S. trade balance is to play games with statistics.

For example, suppose an American company was making $100 million in export goods in the U.S. for foreign markets. Now, suppose it moves the assembly portion of that manufacturing process overseas, where half the value of the final products is produced. At this point, instead of $100 million in exports, there are only $50 million. America has thus lost exports and jobs–even though the foreign affiliate itself has a negative trade balance with the United States. For better or worse, however, S. 1355, does not address this situation.

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