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Are corporate tax breaks now ho-hum?

Tax form with pencil pointing to "Amount you owe"

TEXT OF STORY

Kai Ryssdal: Lemme get your reaction to something here for a second. If I told you there was a report out today showing two thirds of all Americans didn't pay any income taxes, would you be surprised? Outraged, maybe? If you are, calm down. There's no report saying that at all. But there is a study out today from the Government Accountability Office saying something similar. It finds that between 1998 and 2005, two thirds of companies in this country had at least one year where they didn't pay any federal income tax. So, back to the outrage. Where is it? Marketplace's Jeremy Hobson has the story from Washington.


Jeremy Hobson: It's always easy to find outrage on Capitol Hill. Here's Democratic Sen. Byron Dorgan.

Byron Dorgan: Corporations used to pay a fair share of the tax burden in this country. They no longer do.

What will Dorgan be able to do about that? Probably nothing, says Harvard Business Professor Mihir Desai.

Mihir Desai: While it's very easy to point your fingers at corporations, it's very tough to actually get legislation passed that contradicts their interests.

Now, no corporations were named in the study, so it's possible many of those that paid no taxes made no money, though the GAO says companies reported trillions of dollars in sales during the relevant period.
Cato Institute Tax expert Dan Mitchell is one American who's not outraged.

Dan Mitchell: We're all better off when American companies are doing well, so I don't buy into this mentality that it's somehow corporations versus people because all corporations are GOA collections of people.

Behavioral Economist Dan Ariely is the author of "Predictably Irrational." He says, for starters, Americans don't get outraged very easily.

Dan Ariely: When was the last time you saw a serious demonstration?

He says it's even harder for us to get all worked up over something as seemingly distant as corporate taxes.

Ariely: There's no question that if these people opened a newspaper and thought that one of their neighbors did not pay their taxes, they would be offended personally. But the fact that a company does it -- it's not really clear to him where the money is going.

Ariely says if people knew how much they were paying to make up for corporations, attitudes would probably change. The GAO did not give a figure on that.

In Washington, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.
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As the owner of a small business that is an S corporation, I'd like to point out that Mr. Levy's explanation of S-corps is considerably off the mark.

As a shareholder-employee of my corporation, I am required to pay myself a "reasonable" salary each year; all of this salary is subject to both income and regular employment taxes (both halves), just like any other employee's paycheck. Furthermore, whether an S corporation pays out its profits is irrelevant to the tax situation; in either case, the profits that were made (whether reinvested or paid out) are passed on as regular income to the shareholders, who pay standard income tax on them.

In response to Dan Mitchell's comment, corporations are not in the business of employing people. Corporations exist to make a profit and to increase that profit. Any threat to either (emphasize "either") of those purposes is always immediately addressed by elimination of personnel. So much for the people.

Your report fails to address the fact that most corporations are not designed to have profits, the basis on which taxes are determined. Most corporations are small, closely held Subchapter S or Chapter C's. In either case they pay all of their profits out to their sole owner or small group of owner/workers. These "owner/workers" pay the tax on the "profits". Precisely because their retained earnings will be taxed, the corporation pays the money out. The government says, "either use it or lose it to taxes". So, the corporation pays it out as wages or dividends.

By lowering taxes or even eliminating taxes on closely held Subchapter S corporations, the government would encourage capital investment. As it stands, the government encourages wasting corporate resources by paying out profits before they can be taxed. Therefore, few such corporations retain earnings. The result is that the "owner"
or CEO of such corporation is encouraged to buy a new BMW rather than invest in new, modern equipment or simply have the corporation save money so that it borrows less in the future.

I was very disappointed with NPR's coverage of the GAO's report, Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005. The Senators who requested that GAO produce the report, Dorgan and Levin, knew they would be able to cherry-pick the report for sensational headlines. NPR and the Associated Press played right into the Senator's plan. We expect this of politicians; but we expect better of the press.

The report's purpose was to compare the tax liability of foreign-owned corportations doing business in the US vs. the tax liability of U.S.-based corporations. The issue of corporations' "transfer pricing" to lower tax liabilities is a very real one. But it is an issue that requires international cooperation since all of our major trading partners allow transfer pricing too.

But of course, transfer pricing is a very dry and boring topic. So let's jazz it up a little for the public. It's got to be entertaining, right?

"1.2 million US companies paid no income tax!" your segment said. Left unsaid was that the overwhelming majority of corporations are either SubChapter S Corps or LLCs in which the owners pay taxes on their business income at their individual income tax rate. The highest individual tax rate is the same as the corporate tax rate: 35%. The government loses nothing; the taxes on the income have been paid.

"Corporations paid no taxes even though they had trillions in sales!" was another glaring error in your segment. A company doesn't pay taxes on sales; it pays taxes on income (sales minus costs equals income). If your reporter doesn't understand that, please get another reporter.

Lastly, and this was the fault of the GAO, was to compare "All" corporations to "Large" corporations based upon having more than $50 million in annual sales. That's basically a couple of decent-sized grocery stores. Family businesses which are nearly always Subchapter S or LLCs, as mentioned above. It would have been much more accurate to base the report on the companies in the Standard & Poors 500 (the 500 largest US publicly held companies).

This was not a difficult topic. Boring, yes. Difficult, no. But you do us a great disservice when you commit errors and omissions to make a segment more entertaining.

I'm sorry, but Dan Mitchell's characterization of corporations is pure unadulterated BS. Perhaps Mr. Mitchell should ask the real "people" of the corporations, the workers, whether they've benefited proportionally to the top management positions and well heeled stockholder "people". They haven't been laid off you say? I suppose their productivity improvements which benefited the CEO and those stockholders but did naught for wages don't count.

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