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NO NEWS IS BIG NEWS TO THESE SENATORS

August 13, 2008

Yesterday two Senators, Dorgan and Levin, were trumpeting a new Government Accountability Office study showing that 2/3 of Corporations pay no federal income tax. As it played to the narrative of evil corporations getting away with tax murder, it got lots of press, as the TaxProf's roundup shows.

But something didn't smell right about the numbers. I made a note to look at the study. Fortunately, I see that others got to it first.

First, the study does exclude the obvious non-payers - pass through entities like S corporations and mutual funds, whose owners normally pay the tax on corporate income directly. The study excludes subsidiaries on consolidated returns, whose taxes are paid via the parent company. So far, so good. But Martin Sullivan of Tax Analysts ($link) notes that there's still a lot less to the story of non-payment than meets the eye:

For example, IRS data for 2005 show that there are about 2 million corporations in the United States. (We are limiting our discussion here to subchapter C corporations.) Of these, 1.57 million had assets of less than $1 million.
How important are these corporations? They are small change. These entities -- accounting for 87 percent of the total of corporations -- held only 0.4 percent of all corporate assets.

So the shocking news is that tiny corporations often don't pay tax? Next they'll reveal that eating too much State Fair food will make you fat. I would wager that many of these asset-poor C corporations are professional corporations; as a matter of course, they pay all of their income out in bonuses and salary because any income left gets taxed at a flat 35%. There are zillions of these out there.

When you get to bigger businesses, the zero-tax numbers are much lower. The study found that around 25% of corporations with $250 million of more in assets paid no tax. But guess what? Business is hard. Sometimes businesses lose money - something Congress, with its deficits, should know something about. The Tax Policy Blog puts it this way:

The biggest "tax loophole" at work, however, is unprofitability. In the vast majority of cases, the corporation did not pay tax because it had no profits. The corporate income tax is a tax on profits, and if there are no profits, there are no taxes on those profits. Sen. Levin should be aware of this; General Motors in his home state lost $10.5 billion in 2005, and I'd be surprised if he thinks their "fair share" of taxes on profits should be anything higher than zero. As for corporations that had profits, almost all of them paid taxes.

Yes, there are unfair loopholes that enable taxpayers to pay no taxes. They're there because congresscritters, including Senators Levin and Dorgan, put them there. We'll know that Senator Dorgan is serious about closing loopholes when he votes to eliminate biofuel tax credits for his North Dakota constituents.

Other blog coverage:

TaxGrrrl
The Tax Lawyer's Blog

Tags: Tax Grrrl.tax policy.Tax Policy Blog.The Tax Lawyer's Blog.