Sloppy Times Tax Story

May 3rd, 2011

Today’s front page NY Times features a sloppy story asserting that U.S. corporations do not actually pay high, uncompetitive taxes.  The piece argues that, while U.S. firms face high rates on paper, their slick accountants figure out how they can escape with lower rates.  A few problems with the analysis:  First, it prominently cites a GAO report from 2008 stating that “55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period.”  Big deal!   Companies don’t pay taxes when they lose money, only when they profit.  The period 1998-2005 included the 2001 recession, which sparked stock market crashes and untold bankruptcies.  So is it surprising that in this seven-year period somewhat over half the companies may have suffered through one year where they didn’t earn a profit?   

Second, even after escaping the statutory tax rate, American firms still pay about 9% more than the OECD average, 27.1% versus 24.9% for the OECD.   (The OECD number would be lower if we threw out Japan’s paralyzing 46.3% rate.).  Since when is a 9% difference not important to companies trying to eke out a competitive edge?  Remember, on Wall Street a 3%  dividend is considered big!  

Finally, remember transaction and legal/accounting  costs.  To drive down the effective rate, corporations waste billions on tax lawyers and accountants, and engage in needless machinations.  Early in my career I was involved in “triple-dipped leverage leases” of airplanes.  When one Boeing airplane was purchased, 3 different entities in three different countries would claim ownership in order to deduct interest and depreciate.  It was tax code magic.  And pretty much a disgrace to good sense.

Bottom line:  the U.S. tax code does not put out a welcome mat to U.S. corporations. In fact, the code waves a goodbye flag and encourages them to skip town.

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