The Corporate Tax-Dodge Code

Wolf Richter's picture

Wolf Richter

Between 2002 and 2011, Boeing reported to its investors that it earned $31.8 billion. But it reported something entirely different to the IRS and didn’t pay income taxes. Instead, it received tax benefits of $2.06 billion, an effective tax rate of -6.5% (CTJ fact sheet). Other companies were similarly agile. Bailed-out GE earned $10.5 billion, paid zero taxes, and received $4.7 billion in tax benefits. Of 280 companies that the CTJ researched (report), 30 paid no federal income taxes from 2008-2010. They were all using loopholes, subsidies, and offshore strategies to do what the tax code encouraged them to do: dodge taxes.

So now, Treasury Secretary Timothy Geithner is ballyhooing President Obama's latest election-year ploy of putting some fresh lipstick on the tax code: lower the top rate from 35% to 28%, close loopholes, cut subsidies, and make offshore profit-shifting strategies more difficult. Then, in the same breath, he proposed new loopholes and subsidies—but for different constituencies, such as manufacturers.... Oh wait. Aren’t Boeing and GE manufacturers? But they’re already not paying taxes. So hand them even more tax benefits?

Why yes. GE CEO Jeffrey Immelt heads President Obama's Council on Jobs and Competitiveness. And taxpayer subsidies make GE more competitive. Same with Boeing. In that respect, the White House released a paper, Investing in America: Building an Economy That Lasts, intended for Immelt’s CEO colleagues not the Democratic rank and file. It outlines policies to make America competitive with low-wage countries like China and points at an accomplishment: dropping real wages in the US. For that whole debacle, read.... When The White House Touts Falling Wages.

On the Republican side, there has been a garden variety of tax-cut proposals, the latest from Mitt Romney. They also address some of the symptoms of what’s wrong with the tax code. But none address its most fundamental flaw. A flaw that produces the absurdity where some highly profitable companies pay no taxes while others pay them out their nose: diametrically opposed accounting systems for reporting to investors and to the IRS.

GAAP, our glorious body of accounting principles, allows companies in a myriad ways to inflate profits and incentivizes them to engage in economically unproductive activities to make their numbers look better. Goal: maximize reported income.

The corporate tax code does the opposite. It encourages the very same companies that reported inflated incomes to their investors to report little or no income to the IRS. It incentivizes companies to invest in economically unproductive activities, such as lobbying or shifting income offshore. Goal: minimize taxable income.

Rather than dinking with percentages and loopholes in the corporate tax code, Congress needs to throw it out and replace it with GAAP. Tax accounting and financial accounting would become the same. This would have highly beneficial consequences. Among them:

- Tax rates could be much lower because the income they’re applied to is the same inflated income that investors get dished up on a quarterly basis. Rates could be low enough to incentivize companies to keep profits onshore.

- Companies could choose: inflate profits to look good to investors but pay more in taxes; or report conservative numbers and pay less in taxes. Unintended consequence: financial reporting might become more reliable.

- Companies would have some certainty about income taxes and could commit to long-term investments with less risk.

- IRS auditors would do tax audits based on GAAP.

So if Boeing reported $5.1 billion in profit to its investors, as it did for 2011, it wouldn’t get a tax benefit of $635 million, as it did, but would instead pay income taxes at a low rate on the $5.1 billion. And companies that are now paying taxes at extravagant rates would pay less. It would bring a measure of fairness to corporate taxes.

Alas, that ugly corporate tax code is the congressional bread and butter—a tool with which lawmakers extract campaign contributions and other goodies from their corporate sponsors. And that will never change. For the astonishing debacle of their approval ratings, which are trending toward, well, zero, read.... The Most Disparaged Profession.

Profitable tax dodgers would dig in their heels. Companies that would see their tax bills fall might jump into the fray in support. Lobbyists on both sides would raise a ruckus. The noise level would blow out our national eardrums. Even President Obama, the populist yes-we-can campaigner, is financially dependent on the corporate elite and has to please them. With that in mind, he came to San Francisco for some epic fundraisers. For that astounding display of whom he is beholden to, read.... That Giant Sucking Sound in California.

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oleander garch's picture

GE claimed $14 billion dollars in income and paid 0 in income tax in 2010. All thanks to the General Accepted Accounting Principals and the millions of dollars they spent for lobbying and pumping into campaign coffers for Senators and Congressmen.

coltek's picture

Corporate welfare. It has been going on for years and years.


If the IRS were to collect all the corporate taxes actually due to them over the years, there would be no national debt.

Northeaster's picture

Want to play "hide your money" right here in The United States?

It's been a couple years since I did it for clients, but pretty sure one of the states is still a go. Nevada and Wyoming had some of the most lax corporate entity formation laws in existence (Wyoming was working on closing the loophole). Clients wanted to hide their money, didn't matter from who or how much, but you formed a shell company in Nevada or Wyoming, all with fictitious names and addresses.Why? Because neither state cared and none asked. I had one client with 5 entities with their named spelled backwards, with a Roman Numeral system in order to differentiate them (anyone that ever watched television in the past 10 years would know the client). Dissolve them in a year (so lazy state workers are none the wiser, and politicians don't give a fuck), rinse & repeat under a new name. Profit, hide your money from spouse, taxes, whatever.

The big boys just do it in the open off-shore and legally, made possible by our own CONgress.

spanish inquisition's picture

As a citizen of the US, I am also "people". I enjoy the opportunity to be taxed on all earnings worldwide. Corporations are now "people", yet they pay no taxes on worldwide profits to the US.

I guess I need to incorporate myself.....

Zappalives's picture

Yes........form an llc or at least a sole prop.

I paid 4% for 2011.

Its legal and it hits em where it hurts.

Shizzmoney's picture

The thing is, if I actually were to benefit from getting these things in my paycheck called, "raises" and "bonuses" in my paycheck......maybe I'd actually fucking support these type of tax practices.

But the majority of the money goes to off-shore bank accounts and buy Jeffery Immelt another yacht.

I can't wait til the shit collapses.  An evolutionary correction is in order. 

Widowmaker's picture

If that Fuck-up Geithner does anything but put the muzzle of a weapon in his mouth is beyond me.

The writing is on the wall, Tim.  Pull the trigger now or later, either way America wants your brains all over the writing.  The Geithners deserve absolutely nothing but shame, and history will brand his tenure as the days that Crime Incorporated took over and fucked Liberty.


"We saved the banks but lost America."  - F. Geithner

El Gordo's picture

Corporations don't pay income taxes anyway.  They merely collect the taxes from their customers and pass them on along to our rich uncle.  Individual consumers pay taxes regardless of who report them.

CAUSE_EFFECT's picture

Just a quick question.  Do corps. use the federal court system and the federal avaition system much to condut business, among a long list of many others.  Just wonderin' - Beuhler... Beuhler....

bigwavedave's picture

i dont see the big numbers in taxation. i see the big numbers in financial repression. only the prior savers can pay. lol. they deserve it the hippy scum most of them are!

rufusbird's picture

I am very please to see your article and I agree with it, but...

After a career in the equities industry I have been waiting for this kind of reform for 30 years. I don't expect I will live long enough to see it.

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ebworthen's picture

Welcome to the Kleptoligarchy.

StychoKiller's picture

@Wolf:  Yer cruzin' for a one-way ticket to GITMO with these terrist ideas...

Maos Dog's picture

Regarding this:

GAAP, our glorious body of accounting principles, allows companies in a myriad ways to inflate profits and incentivizes them to engage in economically unproductive activities to make their numbers look better. Goal: maximize reported income.

Ha ha! you aint seen nothing yet!! Wait until the ifrs convergence project is finished!

non_anon's picture

just read on Drudge 49.5% don't pay income tax, the middle class carries the brunt of personal income tax, but the middle class has been milked dry.

Kobe Beef's picture

USSA = win win

The Fascists got their Warfare State. The Marxists got their Welfare State.

These two federal monsters turned out to be too voracious to maintain a middle class majority. The Washington Consensus? Business as usual. More taxes, more borrowing, more spending.

R.I.P., Middle Class.




Coldfire's picture

Decry the hypocrisy that upholds paying income tax as some kind of virtue whilst paying none, but don't be confused into supporting income tax, which is an emblem of slavery and worse than theft.

LowProfile's picture

Wages aren't income.  But fuck income tax anyway.

Instead, only tax dividends & capital gains.

No tax on gold or silver bullion or coins.

If we did that, this country would be amazing inside of 10 years.

The Navigator's picture

No tax on gold or silver bullion or coins.

A tax on Gold Silver bullion or coins is a a tax on our currency.

The FRN is not our currency, Gold and Silver is our currency

Go find something else to tax Bitchez. And consult the Constitution while you can.