Why U.S. corporations aren't on a level field with other countries.
Ignorance of accounting principles, along with left-imbued philosophy, are churning up a political storm against beneficial future tax policies for U.S. industry—policies that could create needed American jobs.
One left-wing advocacy group, calling itself Citizens for Tax Justice (CTJ) (a real stretch in the definition of justice) is engaged in a study of Fortune 500 companies with the wacky accusation that some of the world’s more respected corporations deliberately don’t pay income taxes.
Previewing its major study, CTJ recklessly claimed, in an analysis of 12 major corporations that they pay an “effective tax rate of negative 1.5 percent on $171 million in profits and reap $62 billion in tax subsidies.”
The outlandish analysis, CTJ claimed “serves to illuminate the current corporate tax debate in Washington, and demonstrates that real corporate reform—meaning higher taxes--is long overdue.”
A flurry of sensational news media accounts recently about taxes paid by large corporations have fired up a debate over the different ways a company’s profits and tax liabilities are given to shareholders on financial statements and what is reported on a company’s tax return to IRS.
The Ways and Means Committee in June continued its series of hearings at which Chairman Dave Camp (R-MI) said, “The Tax Code is preventing, not promoting, job creation. Our focus is on what actions must be taken to reform our Tax Code and make America a more attractive place to invest and create the jobs we need.”
At the hearing, a member of the committee, the habitually arrogant Rep. Fortney “Pete: Stark (D-CA) asked to have inserted in the record the release from the Citizens for Tax Justice.
One of those corporate tax pros testifying was James H. Zrust, tax vice president for the Boeing Company. For the past three years, Rep. Stark recounted in an acid tone, Boeing made ”about $10 billion, but had a negative tax rate.”
Zrust attempted to respond, but Stark kept interrupting him, asking questions dripping with sarcasm:
“How much lower tax do you need to survive, Mr. Zrust?”
“Let me tell you what this [reported negative tax payment] is attributable to...,” Zrust tried to say.
“I know what is attributable to,” Stark shot back, as if he were all-knowing.
Finally, Zrust explained that deductible expenses of production in recent years were attributable to new products, an expanding workforce and pension costs. When allowed to speak, Zrust explained that in future years Boeing would be paying considerable taxes as its aircraft were sold—probably “in excess of 33 percent.” Zrust also mentioned that 30 IRS agents work continuously at Boeing offices to keep watch on Boeing’s proper tax accounting.
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.