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Monday, February 28, 2011

Assault on the Middle Class: TAX LOOPHOLES

I spoke in an earlier Blog about the important legislative initiatives that President Obama should take to frame the debate with Republicans and Tea Party members.  Unfortunately, the President has allowed the debate about cutting government spending to be framed by those who have already railroaded him into extending tax cuts for the richest 1-2%, and who now want to debate how much should be cut from the modest 12% of discretionary funding in the federal budget, and from entitlements like Social Security, Medicare and Medicaid, that most affect the middle class and the poor. 

It appears that the President has chosen not to frame the debate in a direction that would call attention to the favoritism shown by Congress to the rich and powerful.  This is totally regrettable.  In my opinion, he should be relentless in pointing out that two wars in the Middle East favor private contractors like Halliburton and Blackwater who have taken advantage of those conflicts to reap millions, if not billions, of dollars in contractual profits.  He should be concentrating on the fact that rich corporations, banks, and brokerage firms have stolen money from the American taxpayer, and that no one has gone to jail or even been charged with crimes against the people (where’s his Justice Department?) -- talk about waste, fraud and abuse…!  He could also be talking more about how rich corporations are holding their massive profits hostage, not wanting to spend for jobs and new equipment because their profits have soared.  Is the President “dithering” while the middle classes are being consumed in the inferno created by the right-wing radicals? 

There is no greater fraud and waste in government than the loopholes and incentives built into the U.S. Tax Code.  It is time to examine some of them, and to demand that they be excised or modified to give everyone a fair shake, and to prevent the ability of a privileged few from escaping the full payment of their tax obligations.  What an opportune time -- TAX TIME -- to frame the debate differently, and to point a finger where it belongs.

According to an article on, the USA has one of the top corporate tax rates in the world: 35%.  However, the actual amount in corporate taxes that the government collects (“the effective tax rate”) is lower than those of Germany, Canada, Japan and China, among others.  Those loopholes will cost the U.S. government an estimated $628.6 billion over the next five years, according to a 2010 report from the Tax Foundation.  Here’s what that Fiscal Times article says are some of the major loopholes for corporations to quietly wriggle through while the rest of us make up the lost tax revenue:

1)    Inventory Property Sales
    Foreign income of American companies is taxed in the country in which it is generated, and the U.S. gives a tax credit for that amount in order to avoid double taxation. Some companies have accumulated a glut of such tax credits (the “inventory”), and in order to use them up, they artificially boost foreign income through a “title passage rule” that allows companies to allocate 50 percent of income from U.S. production sold in another country as income generated by that foreign country (the “property sales”).

2)    Graduated Corporate Income
    This policy places the first $50,000 of a corporation’s profit at a 15 percent tax rate, with higher profit levels garnering higher tax rates, until it tops out at 35 percent for taxable corporate income exceeding $335,000. The result is that an owner of a small corporation pays only 15 percent in taxes on the first $50,000 of profit, leaving more left over potentially for reinvestment and growth. So what do larger corporations do?  Of course: they divide up their company into smaller entities that can qualify for this tax break!

3)    Research and Experimentation Tax Credit
    Intended to spur research and development within companies, in its simplest form this break allows for a 20 percent tax credit for “qualified research expenses.” There are more complex applications, as well. Detractors complain that it is paying corporations to do research they would have done anyway.

4)    Deferred Taxes for Financial Firms on Certain Income Earned Overseas
    Because most financial firms conduct their foreign operations as branches rather than as subsidiaries, as most companies in other industries do, they do not benefit from the tax breaks afforded to foreign subsidiaries. To compensate, this loophole enables financial firms to treat income from their foreign branches as if they were subsidiaries, along with all of the attendant tax benefits.

5)   Alcohol Fuel Credit
    This is a tax credit for the production of alcohol-based fuel, most commonly ethanol, which is made from corn. The credit ranges from $0.39 to $0.60 per gallon. In theory, the credit is meant to encourage alternative forms of energy to imported oil. It is largely responsible for propping up the price of corn, and is extremely popular in corn-producing states like Iowa and Illinois, primarily benefiting food and agricultural conglomerates in these areas. 

6)    Accelerated Depreciation of Machinery and Equipment
    This one allows companies (airlines & manufacturers using large equipment) to deduct for all of the depreciation of a piece of equipment at once (as opposed to over the, say, 20 years it actually takes the item to depreciate). This is the equivalent of the U.S. government giving the company an up-front, interest-free loan. Congress recently made this expenditure temporarily even larger for 2011, to encourage investment in equipment.

7)    Deduction for Domestic Manufacturing
    This loophole enables a tax deduction for manufacturing activities conducted by American companies within the United States. It covers conventional manufacturers, but also extends to industries like software development and film production. The intent is to keep manufacturing from being outsourced.

8)    Deferral of Income from Controlled Foreign Corporations
    Multinational companies can defer paying U.S. income taxes until they transfer overseas profits back to the United States, under this law. In practice, many companies leave much of their profits overseas indefinitely, thus paying only the tax in the relevant foreign country, which is likely far lower than the U.S. rate, and avoiding U.S. taxes permanently. The list of corporations enlisting this loophole is seemingly endless, and the estimated 5-yr Cost to Government is $172.1 billion.

The article goes on to assert:
America's corporate tax rate is 35 percent.  But 115 companies on the S&P 500 pay less than 20 percent in taxes, according to a study by the Capital IQ and The New York Times. That's not even counting 37 companies like Citigroup and AIG that received more in tax credits than they paid.  All this thanks to loopholes in the immensely complicated tax code.
Business Insider tracked down the data from Capital IQ (2005-2009 aggregate data) to identify some of the large corporations that pay less than 5 percent in taxes:

#15 Boeing Co. (BA)
Pre-tax income: $17,587 million
Taxes paid: $796 million
Tax rate: 4.46%

#14 (AMZN)
Pre-tax income: $3,512 million
Taxes paid: $152 million
Tax rate: 4.33%

#13 Broadcom Corp. (BRCM)
Pre-tax income: $1,228 million
Taxes paid: $41 million
Tax rate: 3.32%

#12 Host Hotels & Resorts Inc. (HST)
Pre-tax income: $1,116 million
Taxes paid: $34 million
Tax rate: 3.05%

#11 NRG Energy, Inc. (NRG)
Pre-tax income: $5,343 million
Taxes paid: $154 million
Tax rate: 2.88%

#10 TECO Energy, Inc. (TE)
Pre-tax income: $1,620 million
Taxes paid: $37 million
Tax rate: 2.31%

#9 Allegheny Energy Inc. (AYE)
Pre-tax income: $2,538 million
Taxes paid: $58 million
Tax rate: 2.28%

#8 NVIDIA Corporation (NVDA)
Pre-tax income: $1,817 million
Taxes paid: $41 million
Tax rate: 2.24%

#7 Xcel Energy (XEL)
Pre-tax income: $4,334 million
Taxes paid: $77 million
Tax rate: 1.78%

#6 NextEra Energy, Inc. (XEL)
Pre-tax income: $8,572 million
Taxes paid: $149 million
Tax rate: 1.74%

#5 Plum Creek Timber Co. Inc. (PCL)
Pre-tax income: $1,355 million
Taxes paid: $22 million
Tax rate: 1.62%

#4 Western Digital Corp. (WDC)
Pre-tax income: $2,507 million
Taxes paid: $40 million
Tax rate: 1.6%

#3 HCP, Inc. (HCP)
Pre-tax income: $614 million
Taxes paid: $9 million
Tax rate: 1.42%

#2 Carnival Corporation (CCL)
Pre-tax income: $11,250 million
Taxes paid: $126 million
Tax rate: 1.12%

#1 Range Resource Corporation (RRC)
Pre-tax income: $1,228 million
Taxes paid: $7 million
Tax rate: 0.53%

Now that the Supreme Court has ruled that these corporate entities must be treated as individual citizens in terms of (political) free speech rights, isn’t it incumbent upon them to act in a responsible manner in terms of paying their taxes like other individual citizens?  It’s time to “call them out”, and to demand that they all pay a minimum tax of at least 20-25% on their profits!  And, to prevent them from passing that extra burden on to the consumer, there must be stringent laws with huge penalties (like 33% of profits) to prevent that from happening!  Because they are able to reduce their tax burdens to less than 5%, they force upon the rest of us the extra burden of paying for their less-than-fair share.  That’s right middle-class America -- YOU are paying not only inflated rates for their services and products, but for most of their tax burden in order for YOUR government to operate. 

YOU are being thoroughly bamboozled by these corporate entities mainly because you not only allow them to avoid paying their taxes, but because you allow them and their cronies (lobbyists, law firms, congress people, and media) to convince you that our fiscal problems mainly result from entitlements and social programs that benefit the middle classes and the disadvantaged.  YOU are paying for their neglect, their cronyism, their  profits and their robbery from the public purse.  Their stealthy stealing is  immensely increasing your personal and governmental debts. 

It is time to stand up against the rich corporations that neglect their public duty; we just can’t afford to take it anymore!