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New CTJ Corporate Tax Study and Wisdom from Groucho Marx

By: Joseph Bishop-Henchman

Sister organizations Citizens for TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP) released a report yesterday, finding that Fortune 500 companies paid little or no state corporate income tax during the 2008 to 2012 period according to SEC filings. Looking at a select 269 companies on the Fortune 500 list, CTJ/ITEP found that 90 companies paid no state corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. in at least one year and 37 companies paid no tax in at least two years. (It's unstated but it seems that all companies paid tax in at least one year.) Collectively, the 269 profitable companies reportedly earned $2.3 trillion in profits and paid $70 billion in state corporate income taxes, an average state tax rate of 3 percent. CTJ/ITEP considers that low, and accuses the companies of "avoidance" of perhaps another $70 billion in state tax.

Beneath the report's headlines, the authors acknowledge that they actually made significant changes to the numbers reported to the SEC, artificially boosting profits earned. In addition, by cherry-picking only 269 of the 500 Fortune 500 companies, CTJ/ITEP is able to minimize the taxes paid compared to what they actually are in reality. Even if their numbers are accurate, CTJ/ITEP's policy laundry list is unrelated to the real mundane causes of low state corporate tax payments from 2008 to 2012: a bad economy that led to unprofitable years, a federal tax code mismatch that means what companies spend in reality is greater than what they can deduct from tax, and smoothing tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. s owed in unprofitable years with taxes paid in profitable years. (We've previously caught ITEP inflating numbers to present a distortive view of reality, see Item #3.)

  • Although the report ostensibly tries to explain why corporations paid less tax during the 2008 to 2012 period, CTJ/ITEP's report does not discuss the economic recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. . That had a big effect on profitability and taxes paid, probably moreso than any fancy tax evasion planning. The economy is mentioned only in passing in the methodology discussion on page 46, where CTJ/ITEP describes how they treated corporate write-downs after the crash.
  • CTJ/ITEP claims they use SEC numbers, but they make significant alterations to corporate write-downs and other expenses, inflating the profit number above what is reflected on SEC, IRS, and state forms. The authors "adjust" corporate data to exclude a number of corporate expenses categories and add them back to profits. Maybe the authors don't think impairments due to the economic collapse in 2008-09 should count as real economic losses, but they do count on SEC and IRS forms. Adding them back to profits here is a number fudge to boost what CTJ/ITEP can claim corporate profits were, distorting all subsequent calcualtions.
  • CTJ/ITEP excluded unprofitable corporations, exaggerating their calculation of Fortune 500 profits and minimizing the average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. paid. CTJ/ITEP reports that the Fortune 500 companies in their sample paid only $70 billion in state tax on $2.3 trillion in profits. However, CTJ/ITEP chose to report only on 269 of the 500 companies, excluding any that had an unprofitable year in the 2008 to 2012 study period. If they had included all 500 companies, profits would have been lower and taxes would have been higher than what their report showed.
  • CTJ/ITEP talks a lot about tax shelters and avoidance schemes and buries the actual drivers behind any low state corporate tax payments: bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. and net operating lossess. If a company brings in $100 million in revenue, spends $80 million on expenses and $20 million on capital investment, it has a cash profit of zero. However, the SEC and the IRS do not allow immediate expensing of capital investment — companies must instead depreciate it over time. Thus this company could only deduct a portion, say $5 million, of the $20 million in capital investment, resulting in a reported $15 million profit despite cash earnings of zero. CTJ/ITEP plays on this distortion, calling bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. (a federal law allowing companies to deduct capital purchases faster, which does not reduce tax revenues but merely shifts them in time) a "federal tax giveaway" and even equating net operating loss deductions (balancing profitable years with unprofitable years for tax purposes) to "tax breaks."

The report has a lot of rhetoric about avoidance techniques, tax shelters, and giveaways. In the fine print, however, even they acknowledge that bonus depreciation and net operating loss deductions are the key cause of lower tax payments in the 2008 to 2012 period. I agree with them that targeted tax incentive packages are bad policy but that's behind low tax payments for only a handful of companies. To quote Groucho Marx, CTJ/ITEP is finding the wrong numbers, misdiagnosing the cause, and misapplying the wrong remedies.