DC Johnston: How U.S. companies get rich off taxes

My main bearded tax expert David Cay Johnston is back with more perfectly legal scams that big business use to get rich at our expense. Here it is in layman's terms:

Imagine how your bank statement would look if, instead of having taxes taken out of your weekly paycheck, Congress let you keep that dough in return for your promise to pay your taxes years or decades from now—and sometimes, never.

That’s the extraordinary deal Congress gives many big American companies now sitting on hundreds of billions of dollars of what are, essentially, interest-free loans. Apple and GE owe at least $36 billion in taxes on profits being held tax-free offshore, Microsoft nearly $27 billion and Pfizer $24 billion, according to Citizens for Tax Justice, a nonprofit organization respected for the integrity of its numbers even by groups that dislike its progressive perspective.

'Twas not always thus, Johnston reminds us, and as usual, it's Reagan's fault [emphasis mine]:

The use of offshore tax havens to convert profits into expenses stems from a 1986 change to Section 531 of the tax code. Starting in 1909, Congress imposed a 15 percent penalty on corporate cash-hoarding. That was supposed to encourage companies to reinvest and pay salaries and dividends, rather than weaken the economy by stuffing profits into the corporate equivalent of the proverbial mattress.

The 1986 amendment said companies could hold unlimited amounts of cash, provided it was in offshore accounts. Today at least 362 of the Fortune 500 companies have more than 7,800 tax haven subsidiaries, many stuffed with cash, according to a tiny nonprofit research organization, the Institute on Taxation and Economic Policy. 

Johnston also reminds us of the IRS's double standard, one for all of us Joe Schmoes and another for corporations: "For the vast majority of people with regular W-2 jobs, income taxes are taken out before you get your check. Congress does not trust you, so it demands its cut up front and requires your employer, bank and stockbroker to verify what they paid you."

However, [emphasis mine]:

[I]f you are a multinational, the government takes your word on how much you owe, subject only to the increasingly rare audits by the IRS. Top IRS auditors, paid about $150,000, each find on average $19 million of corporate taxes due each year, according to data the IRS discloses to Syracuse University researchers each month. Even though each auditor finds $126 in taxes owed for each dollar he or she earns in pay (a great return on investment), Congress has been steadily shrinking their ranks for more than two decades. It also hobbles auditors by allowing them to look only at issues the companies have been warned about, a practice similar to food, hospital and pet shop inspectors tipping businesses off that they are coming so they can clean up first.

Let me highlight that: the IRS is the only government agency that makes money -- it enhances our government's fiscal position, making our government less likely to go bankrupt -- and yet Republicans in Congress consistently underfund the IRS as it tries to enforce the tax laws already on the books. 

(So next time Republicans say they won't pass immigration reform because President Obama won't enforce existing laws, you'll know they're hypocrites.)

Perhaps the most perverse thing that happens is this:

Many companies, though, take a much simpler and safer approach when investing their untaxed profits. They buy U.S. Treasuries, those bonds the government sells because it spends more than it collects in taxes. In that way, the federal government pays companies to delay paying their taxes.

This is a classic heads-you-win-tails-I-lose economic plan: The government loans money to big companies interest-free, then borrows it back with interest.

Pretty sweet deal, if you can get it!

Corporate Deadbeats: How Companies Get Rich Off Of Taxes

By David Cay Johnston

September 4, 2014 | Newsweek

URL: http://www.newsweek.com/corporate-deadbeats-how-companies-get-rich-taxes-268303

U.S. tax system targets workers

Everybody in America -- but especially anti-tax conservatives -- needs to read and understand this:

To sum up: The overall rate for wealth-based taxes has been decreasing while the overall rate for labor-based taxes has been increasing. At the same time, the potential base for labor-based taxes is migrating to the wealth-based tax side. And an ever-increasing portion of that potential base for wealth-based taxes faces no tax at all.

Lord and Pizzigati also note what I've been saying for a while now, that redistribution of wealth is alive and well in America -- but from the bottom-up, from workers to shareholders and managers -- not from the rich down to lazy welfare moochers:

Here's how. Until around 1980, wages kept pace with gains in productivity. Since then, productivity has continued to increase while wages have stagnated. The result? The allocation of income between labor and wealth has shifted, with more dollars going toward higher corporate profits, dividends and capital gains than toward wages. Tax rates are shrinking for booming profits, while rising for shrinking wages.

A tax system that targets workers

By Bob Lord and Sam Pizzigati

June 20, 2013 | Los Angeles Times

Imagine a society with two tax systems. One taxes the wealth people have accumulated. The other taxes the labor people perform. This society seems to be getting along well enough, raising enough tax revenue to finance the public goods and services that voters have told lawmakers they want to see supported.

Now imagine that lawmakers have decided to cut the tax rates on wealth and raise them on labor. At the same time, the amount of wealth subject to the lower tax rates is rising as income from labor is shrinking.

That society, we would agree, is asking for trouble. In real life, would any society choose to take such an unsustainable course? One already has — the United States since 1980.

In America today, virtually all the taxes that local, state and federal governments levy can be classified as either wealth-based or labor-based.

The wealth-based taxes include the state and local property taxes we pay on an annual basis and the one-time taxes on large inheritances and estates. Wealth-based taxes also include taxes on the income people get from holding wealth — dividends and interest, for instance — and the capital gains income from buying and selling assets. Throw in the corporate income tax here, too.

Labor-based taxes obviously cover the levies paid on the income we earn from the work we do. These include personal income taxes and the payroll taxes that fund Social Security and Medicare.

These labor-based taxes also include the more difficult to categorize sales and sin taxes. The lion's share of the revenue raised from these taxes, we would argue, comes from people spending their labor-based income on basic living expenses or, in the case of sin taxes, on cigarettes and alcohol.

What has happened to the rates in these two tax systems?

Over the last three decades, the rates for wealth-based taxes have been plummeting.  In 2011, the effective corporate income tax rate dropped to a 40-year low of 12.1%. The top federal estate tax rate has sunk from 70% to 40% since 1981. Estate-tax avoidance strategies have brought the actual rate paid on large estates down to less than half that. Many states have abandoned the state inheritance tax altogether.

The tax rate on capital gains did recently increase at the federal level, but the long-term trend has been downward, and the rate of tax on dividends has fallen dramatically, from 70% in 1980 to 20% today. Finally, beginning with the passage of California's Proposition 13 in 1978, average property tax rates nationwide have declined sharply.

Meanwhile, the rates for labor-based taxes, taken together, have increased.  Average Americans do pay federal income taxes at a slightly lower rate than 30 years ago. But the effective payroll tax rate has increased sharply, as the ceiling on wages subject to Social Security taxes has risen and the ceiling on wages subject to Medicare taxes has been removed entirely.

On top of that, sales taxes have also increased steadily, as have sin taxes.

The two tax systems, however, don't operate on a totally separate basis. The money that makes up the base in one system can migrate to the other. Over the last three decades or so, the available tax base from our labor-based tax system has been migrating to the wealth-based tax system.

Here's how. Until around 1980, wages kept pace with gains in productivity. Since then, productivity has continued to increase while wages have stagnated. The result? The allocation of income between labor and wealth has shifted, with more dollars going toward higher corporate profits, dividends and capital gains than toward wages. Tax rates are shrinking for booming profits, while rising for shrinking wages.

But that's not the worst of it. Tax rates in the wealth-based tax system aren't just decreasing. An increasingly higher share of the dollars in that system escape taxation entirely.

This growing exempt pool of wealth includes pension plans, IRAs, 401(k) plans, life insurance and annuity policies, municipal bond portfolios and funds held offshore. Most of this wealth sits in the portfolios of the richest families. Over recent decades, this tax-exempt chunk of American wealth has grown faster than our aggregate wealth — about $20 trillion, not including what may be as much as $10 trillion in wealth parked in offshore tax havens.

In the estate tax arena, it's the same dynamic. The exemption from estate tax has swelled. In 1981, the first $175,625 of the estate an affluent American left behind faced no estate tax. Today, the first $5,250,000 is exempt. And with the help of a decent estate planner, that exemption can be leveraged into a much higher number.

To sum up: The overall rate for wealth-based taxes has been decreasing while the overall rate for labor-based taxes has been increasing.  At the same time, the potential base for labor-based taxes is migrating to the wealth-based tax side.  And an ever-increasing portion of that potential base for wealth-based taxes faces no tax at all.

This is unsustainable.

DC Johnston: U.S. companies hold $5.1 trillion in cash

My man David Cay Johnston is on the case:

The Fed's latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today's dollars, triple the Fed figure.

Yeah, it's all because of uncertainty over Obamacare.  Yeah, that's the ticket.  We still need to cut the corporate tax rate!

Seriously though, we need to close overseas tax loopholes.

Idle corporate cash piles up

By David Cay Johnston

July 16, 2012 | Reuters

URL:  http://blogs.reuters.com/david-cay-johnston/2012/07/16/idle-corporate-cash-piles-up/

When they say 'offshore' they really mean OFF SHORE

Umm... this is messed up. I give these guys credit for trying something new, but... this is messed up.

I mean, this offshoring is barely off the shore... of San Diego.

What's next, an artificial island, perhaps made of the Great Pacific Garbage mass?

Or how about a sweatshop in a hydrogen-filled zepellin? A submarine, perhaps?

I found an article about SeaCode from 2005, so this is not a new thing... nor an unsuccessful thing, apparently, if they're still doing business in 2011.

So here's the deal: a few hundred Indian and Russian (which could mean Ukrainian, Belarusian, whatever) programmers sit on an old cruise ship and do programming work for galley-slave wages. Presumably there is no daytime excursion, shuffle board, aqua aerobics, casino, or open bar, so that's all they do. These floating refugees are registered as "seamen" in the Bahamas so there are no U.S. payroll taxes. Here's how one article describes SeaCode's business model, which could catch on, don't laugh:

"Surround the USA with shiploads of migrant workers. Suck away the jobs, don't pay taxes, and funnel money overseas as fast as possible. Come into port once a month to dump sewage. When our economy is finally drained they can steam to another coastal nation that still has a few bucks in the treasury."

As Monty Burns would say... "Eeeexcellent."