Tax time: Are corporations paying their share?
Saturday, April 16th, 2011
This story is being co-published with The Philadelphia Inquirer.
Eric Cantor, who has represented a section of Richmond, Va., in Congress since 2001 and now is the House majority leader, would like to craft a permanent U.S. tax system that caters exclusively to those at the top. So, too, Michele Bachmann, the Republican representative from Minnesota, a onetime tax lawyer who hopes to make a run for the White House. Likewise, Tim Pawlenty, the former two-term Republican governor of Minnesota, who also sees himself sitting in the Oval Office. Needless to say, none state their proposals like that. But that’s the way their numbers and provisions add up.
Like others in Congress and the media, Cantor, Bachmann and Pawlenty insist that American businesses are paying too much in corporate income tax. They claim the onerous tax burden is killing jobs and forcing companies to move abroad. To reverse the nation’s fortunes, they say, all Washington need do is slash the corporate tax rate, thereby reducing the amount of taxes these businesses are forced to pay. What’s scary is a growing number of citizens believe them.
That means a forecast made years ago by William J. Casey, a wily Republican from another era who liked to dabble in the intelligence world’s black arts inside and outside the country, and who helped craft the election of Ronald Reagan, is coming true. After taking office, President Reagan installed Casey as the head of the CIA in 1981. Following his first staff meeting at the agency, Casey was quoted as saying:
"We'll know our disinformation program is complete when everything the American public believes is false."
One of the more egregious falsehoods being peddled by the corporate tax cutters is that companies doing business in the United States are taxed at an exorbitant rate. Not so. While the United States has one of the highest statutory rates on the books at 35 percent, the only fair way to measure what companies actually pay is their effective rate — what they ultimately pay after deductions, credits and assorted writeoffs. By that yardstick, companies in the United States consistently pay taxes at rates lower than corporations in Japan and many nations in Europe.
Lest you have any doubt that the overtaxed American corporation is anything but a fairy tale, consider this:
During the 1950s, the decade in which more people joined the middle class than at any time in history — before or since — corporations paid 49 percent of their profits in taxes. Last year, it was about half that rate, a decidedly more modest 26 percent. In 2010, corporate tax collections totaled $191 billion — down 8 percent from $207 billion as recently as 2000.
Perhaps a more telling yardstick, corporate tax revenue in 2009 came to just 1 percent of gross domestic product — the lowest collection level since 1936, or three-quarters of a century ago. In 2010, it edged up to a puny 1.3 percent — the second lowest since 1940. Even worse, the shriveled tax collections came at a time when corporations were registering an all-time high in profits. At the end of 2010, corporations posted an annualized profit of $1.65 trillion in the fourth quarter. In other words, the more they made, the less they paid. As for the corporate share of total income taxes paid by businesses and individuals, it has plummeted from 40 percent in 1950, the dawn of Middle America’s golden age, to 18 percent last year.
The numbers tell us that a lot of politicians, including would-be presidential candidates, are mathematically challenged.
The corporate numbers also explain why hardworking Americans are on a greased downward slope from which they are unlikely to recover, as long as the lawmakers and dealmakers in Washington not only refuse to ease their plight, but also continue to pile on, compelling them alone to pay for the country’s massive deficit while simultaneously chipping away at their safety nets.
In 2008, the latest year for which statistics are available, individuals and families with incomes between $25,000 and $50,000 paid nearly $2,500 on average in individual income taxes — for a tax rate of 7.1 percent. Once again, because select corporations in America know the right people in Washington, they are doing better. Stupendously better, as attested to by documents filed with the U.S. Securities and Exchange Commission (SEC).
Source: The President's Budget for Fiscal Year 2012 Graphic by Julie Snider, the Investigative Reporting Workshop
In its most recent filing, Exxon Mobil Corp., the global energy giant, reported income of $34.8 billion before taxes on total revenue of $310.6 billion for 2009. Its U.S. income tax bill: Zero. Actually, it was a little better than that. Exxon Mobil claimed a tax benefit of $838 million, while it paid $15.8 billion in income taxes to other countries. General Electric Company did equally well. Its report to the SEC showed income before taxes of $10 billion on total revenue of $155.3 billion. Like Exxon Mobil, GE reported no U.S. income tax paid. And like Exxon Mobil, GE also reported a tax benefit, albeit a little larger at $1.1 billion.
It should be underscored that the financial statements filed with the SEC are different than those submitted to the Internal Revenue Service (IRS). That’s because corporations maintain so many different sets of financial records that they would keep a bookmaker’s head spinning for years. Hence, what corporate America tells the SEC is not exactly what it tells the IRS. Both Exxon Mobil and GE insist they will pay U.S. income tax. Precisely how much, or more accurately, how little, will remain a secret.
Exxon Mobil and GE have lots of company. A General Accountability Office (GAO) study of corporate tax returns for the years 1998 to 2005 found that in any given year the number of large, foreign-controlled domestic corporations that reported no income tax liability ranged as high as 54 percent. In short, one of every two big corporations operating in the U.S. under foreign ownership paid no taxes. As for large corporations owned by U.S. citizens, a high of 38 percent reported they owed no federal income tax.
As these and other government statistics show, the United States has two tax systems: A flexible, preferential one for multinational corporations and the rich; a rigid, non-negotiable one for working people. In other words, if you’re not lucky enough to be a global business or a wealthy individual, then you must pay pretty much what Congress dictates. If, however, you are among the privileged, your company makes billions for you and essentially operates tax-free.
To be sure, some corporations pay the maximum 35 percent rate. Like individuals, these companies, often medium-sized domestic operations, are unable to make use of the accounting gimmicks available to multinational and select other businesses.
Nonetheless, corporate America collectively has long whined about paying excessive taxes. This even though it derives the largest benefit from government outlays, especially during war years. In 2010, with not one, but two wars (Iraq and Afghanistan) in progress, both of which have lasted twice as long as World War II, and with a third war (Libya) on the way, corporate tax collections averaged 1.3 percent of GDP. During World War II it was three times that rate — 5.7 percent. Each percentage point difference means individuals must cough up an additional $150 billion. That would be roughly the equivalent of doubling the amount paid by all taxpayers in Connecticut, Ohio, Pennsylvania, Indiana, Missouri and Oklahoma. In short, corporate America does not come close to paying its fair share of government’s cost. Nor, obviously, is it called upon to make any human sacrifice. As for all those hundreds of billions, they simply were and are added to the national debt, a tab that will be borne disproportionately by working Americans.
Carnival Cruise Lines: Exemptions are the norm
What kind of corporation escapes responsibility for any of these bills? Carnival Cruise Lines for one, a Miami-based company whose glitzy megaships have names like Carnival Fantasy, Ecstasy, Elation and Paradise. Over the six years from 2005 to 2010, Carnival — the world’s largest cruise carrier — racked up $13 billion in profits. The company’s tax bill for the six years? Chump change of $191 million. That’s million. And that included U.S. income tax, foreign income and local income tax. The overall tax rate came in at 1.4 percent. This even though the ships sail out of Miami and are inspected by the U.S. Coast Guard.
Middle America has not fared nearly so well, thanks to a Congress that likes to sock it to ordinary people, the same people who are and will be hammered even more as lawmakers target them to be a scapegoat for the ballooning deficits. While corporate profits have continued to climb, the wages of working people remain frozen in time. In 2008, according to Internal Revenue Service data, 10 million working individuals and families filed tax returns reporting incomes between $30,000 and $40,000. Their effective tax rate: 6.8 percent — nearly five times the Carnival rate.
This helps explain how members of the Arison family who started Carnival have held membership in that exclusive club of global billionaires for two decades.
Ted Arison was born in Tel Aviv in 1924 and moved to the United States in 1952. In 1972, he formed a joint venture to establish a shipping business. His partner was Meshulam Riklis, who was born in Turkey but also grew up in Tel Aviv. Riklis, too, moved to the United States, where he eventually became one of the early-day corporate takeover artists, working alongside the legendary junk bond king Michael Milken. His deals were so byzantine that even many on Wall Street had difficulty tracing the money, which always seemed to end up in his pocket while others were left holding his debts. He pioneered the use of junk bonds and leveraged buyouts and corporate paper. Lots of paper. Sometimes he raised cash by raiding the pension funds of his employees, like those who worked at McCrory Corp., one of the old five-and-dime chains that were fixtures in small-town America, and where wages were little more than the minimum. Indeed, the wages were so low that many of Riklis’s McCrory employees did not even earn enough to qualify for a pension.
The Arison-Riklis arrangement lasted only two years, when Arison bought out Riklis, and formed Carnival Cruise Lines in 1974. From then on, he maintained tight control of Carnival. He systematically added ships, passengers and amenities, like gambling. Each of his ships was a floating casino, featuring slot machines, roulette and “big 6” wheels and tables for craps and blackjack.
In 1987, Arison took the company public. Keeping with tradition, then and now, a hefty chunk of the proceeds from the sale of stock to the public went to Arison personally. The take, according to Securities and Exchange Commission records, was a special dividend of $81 million. The following year Carnival immediately began paying dividends to its new shareholders in each quarter. As this suggests, there is nothing new about Carnival’s ability to avoid the tax collector and the Arison family’s attendant good fortunes. We first wrote about Carnival’s tax-free status in November 1991 as part of our America: What Went Wrong? series.
At the time, we noted the fine print in a document filed with the SEC allowed that:
“The company is not subject to United States corporate tax on its income from the operation of ships, and the company does not expect such income to be subject to such tax in the future. This exemption from United States corporate income tax will remain in effect under current United States law for as long as the company retains its status as a controlled foreign corporation.”
Even better for Arison and his family was yet another provision in the SEC public offering document that said:
“The company intends to distribute dividends to all shareholders in at least such amounts as are necessary to enable the principal shareholders to pay the income taxes imposed on them with respect to those earnings.”
Translation: Whatever taxes Arison or his family incurred would be covered by a payment to them from the Carnival Corporation.
To fully appreciate this scheme, when you receive your W-2 from your employer next January, ask if the company would write you a check for the taxes withheld from your paycheck. This is a perk way beyond the reach of those who toil from 9 to 5.
If you still have any doubts about the existence of two distinctly different tax systems, or whether members of Congress have structured one set of rules for the benefit of the ruling class and another for everyone else, consider that Ted Arison renounced his U.S. citizenship in 1990 to further insulate himself personally from the U.S. income tax and returned to Israel. Years earlier, his son Micky, a fixture in Miami, had assumed day-to-day control of the business empire, which also includes the Miami Heat, the National Basketball Association team. The elder Arison died in 1999. Son Micky and daughter Shari inherited their father’s tax freebies, meaning a second generation of the Arison family continues to enjoy the benefits of a company that pays only token taxes, thanks to American lawmakers.
Along the way. Micky and Shari also secured their very own slots on Forbes magazine’s global list of 1,210 billionaires in 54 countries. He is No. 169. She is No. 200.
This story was updated to correct a percentage error.