Free Riders

 

Lee Drutman is communications director for Citizen Works.

"Taxes," wrote Oliver Wendell Holmes, "are what we pay for a civilized society."

But corporate executives, it seems, did not get the memo.

As the recently released study by the General Accounting Office (GAO) shows, most corporations not only don't pay their fair share of taxes"they don't pay anything at all. Among foreign companies operating in the U.S., almost three-quarters (73.3 percent) paid absolutely nothing in taxes in 2000, and 88.5 percent paid less than five percent of their U.S. earnings. Among U.S.-based corporations, more than three in five (63 percent) paid nothing. And a remarkable 93.9 percent owed less than five percent of their income. It's a rate that's been slowly growing since 1996, the report found.

How is this possible? Though the GAO doesn't go into details, Sen. Byron Dorgan, D-N.D., said in a press release that the study's conclusion is "stark evidence" that "gaping loopholes" exist in the tax code and its administration and enforcement. Sen. Carl Levin, D-Mich., who released the study along with Dorgan, said, "Too many corporations are finagling ways to dodge paying Uncle Sam, despite the benefits they receive from this country."

The report found that small companies (defined as less than $250 million in assets or gross receipts of less than $50 million) were more likely than large companies to pay nothing. The percentage of large companies paying nothing in taxes was significantly less than the average"45.3 percent for U.S. companies, and 37.5 for foreign companies.

Unfortunately, the report doesn't look specifically at how many of the companies paid no taxes because they exploited loopholes or engaged in any of a number of tax avoidance strategies, and how many paid nothing simply because they actually failed to turn a profit. Still, with such a high percentage of companies paying nothing or next to nothing, one has to wonder whether something fishy isn't going on in corporate tax preparation land.

Certainly, it's no secret that corporations have been aggressively pursuing tax-reduction strategies for years. Among the 250 largest companies, the effective tax rate is now at about 20 percent, down from 26.5 percent 15 years ago, and almost half of the statutory corporate tax rate of 35 percent. But the decline is not because of changes in tax laws. It's because corporations have become increasingly creative in finding ways to manufacture phony losses on their balance sheets to make the IRS think they earned less money than they did.

They've also become more clever about getting into certain businesses just for the tax benefits. Consider, for example, the popular SILO (sale-in, lease-out) scheme, where corporations, including Altria Group, Wachovia, Bank of New York, Wells Fargo, BB&T Corp. and others purchase local water lines, sewers, public transit systems, hospitals and other municipal properties, and then lease them back to the municipality they were purchased from. As the "owner" of the public assets, a corporation is then able to claim depreciation and interest deductions"deductions that would be of no benefit to the tax-exempt municipalities. This tax dodge is projected to cost the Treasury up to $33 billion over the next 10 years.

Corporate tax shelters, meanwhile, cost the Treasury an estimated $18 billion a year.

And what of the consequences? "When companies dodge taxes," Sen. Levin said. "It falls on the average Americans to pick up the difference."

Consider this: In 1940, corporations and individuals roughly split the federal income tax bill equally. As of last year, corporations were paying just 13.7 percent of the federal tax bill, while individuals were paying 86.3 percent, or almost $800 billion. And according to the Congressional Budget Office, corporate income taxes in 2002 contributed to less than one-tenth of overall federal budget revenues (down from 15 percent in the 1970s and 25 percent in the 1960s). Corporate tax revenues also now represent only 1.5 percent of GDP, down from 4.1 percent in 1965. Such a decline in corporate tax revenue means individual taxpayers are paying more and getting less.

All this, of course, seems particularly relevant as tax day approaches. With millions of hard-working Americans trying to be good citizens and pay their fair share of taxes, it can't help but seem somewhat disconcerting to know that the majority of corporations are paying absolutely nothing in taxes, and that even those that do are working overtime find ways to pay less and starve the public sector of desperately needed resources. It hardly seems like the civilized society that our taxes are supposed to pay for.

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Published: Apr 09 2004