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Other corporate tax experts testified that the U. S. corporate tax rate is 15 percent higher than the average of OECD countries (the 30 high-income foreign industrial companies). The witnesses pleaded for a “level playing field” with foreign companies for taxation purposes.
In some cases, confusion arises and critics come to erroneous conclusions because of the difference between book accounting and tax accounting. It may be confusing to the naïve. But the difference is exploited by the political attack dogs.
As Tax Foundation Economist David Logan explains: Most activities accounted for on a corporation’s financial statement use the accrual method. When a firm receives payment for a product or service, it is immediately taxable income in the eyes of the IRS. But on the corporation’s financial statement, differing corporate accounting standards are set by the Independent Financial Accounting Standards Board (IFASB). These are known as Generally Accepted Accounting Principles (GAAP).
As a simple example, a magazine publisher sells a year-long subscription and receives $60. To the IRS, this is immediately taxable income in the current year. But for book accounting purposes the publisher, uses Generally Accepted Accounting Principles to insure uniformity of accounting. The publisher needs the subscription money to pay for the cost of producing each issue. So, there’s a difference between book and tax profit.
Likewise, when accounting for inventory, two principal methods are used for book and tax purposes: last-in, first-out (LIFO). And first-in, last-out). IRS says businesses using LIFO to account for inventory on tax returns must also use LIFO for reporting taxable income on financial statements, whereas U.S. GAAP allows business to claim income using either LIFO or FILO. U.S. corporations must keep two sets of books: one to comply with Generally Accepted Accounting Practices (which accurately convey the history, health, and prospects of a business), while IRS wants to collect revenue. Often the two methods produce different figures. But it doesn’t mean a business is skirting its taxes due.
Barack Obama’s consistent solution to addressing the federal deficit is higher taxes. This in spite of what industry analysts say. For example, in the case of the standard whipping boy—the petroleum industry, increasing taxation on the petroleum industry, by taking away what the Administration calls “subsidies” would cost thousands of jobs, perhaps as many as 120,000 by 2014.
Those who delight in higher taxes inevitably want to end “tax subsidies” for oil companies. But these aren’t special breaks just for oil companies. All companies have “ordinary and necessary” tax deductions. Liberal Democrats see big oil as the donkey that should always have a tax “tail” pinned on it.
Now, any large corporation is automatically becoming a tax-dodging villain when taxes policies must be changed to create more work in our job-limp economy.
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