ataxingmatter

Friday Animations: Jon Stewart on GE's $14.2 billion profits and zero federal income taxes

The New York Times ran a lengthy expose of GE's offshoring of profits and other tax avoidance techniques.  David Kocienieski, GE's Strategies Let It Avoid Taxes Altogether, NY Times, Mar. 24, 2011.  Don't miss the great  "interactive media" link:  General Electric: Where Taxes are a Source of Profits.

 US companies are supposed to pay a tax of 35% on their worldwide profits.  But there are lots of loopholes (some intended, some not) and many of those have been expanded over the last 20 years, as Congress races to satisfy the corporate lobbyists.  After the 2001 tax cut bill, Congress basically promised the corporate lobbyists they'd get their wish list.  And they did.  The 2003 and 2004 bills weakened the way the foreign tax credit works, so that multinationals can use high taxes paid in one country to offset low taxes paid in another and avoid paying US taxes even on that low-taxed income.  It gave them the 15% rate on dividends, so that the wealthy elite who own most of the capital assets now get preferential rates on their regular streams of income (15% on dividends, 0% on muni-bond interest) as well as low 15% rate on their sales of stock and other securities.  There were lots of goodies from the corporate lobbyists' wish lists that got passed--expensing, shorter lives for depreciation, that special rate reduction for "manufacturers" (that ends up covering the oil and gas industry) that was passed when the WTO made us stop a discriminatory tax provision that favored US industry, the R&D credit, the "active financing" exception to subpart F, and on and on. 

Companies like GE, that hire lots of well-trained tax attorneys and make cutting taxes a big piece of how their businesses work, have made hay out of the laxer code.  They talk a lot about how that 35% statutory rate is just killing them.  But meantime they make huge profits and pay zero taxes.  That's just one facet of corporatism that is damaging ordinary Americans today.

Read the New York Times story first.  But then watch this March 28, 2011 Jon Stewart take on the GE tax avoidance success story.  

Undo the Preferential Rates for Capital Gains--"Responsible Wealth" to launch campaign

If you are one of the few wealthy elites of this country, you have most of your income in forms that are very low taxed.  The wealthy, for example, own most of the municipal bonds:  the income on those bonds is excluded from the calculation of taxable income and is received tax-free.  Dick Cheney had several million dollars of municipal bond interest in one of his first years as VP under Bush. 

But the biggest boondoggle for the wealthy is the low preferential rate for investment gains, generally taxed at 15%.  The rates for capital gains are the lowest in our history, and those low rates are primarily beneficial to the wealthiest amongs us who own most of the capital assets.  Wageearners, in contrast, pay relatively steep rates on their wages, and it is withheld periodically rather than paid well after the end of the taxable year as in the case of capital gains taxes.  Further, wageearners pay Social Security and Medicare taxes, which amount to a hefty tax especially for lower and lower-middle income earners.

This is the primary mechanism for the extraordinarily low taxes paid by private equity fund managers who receive a "carry" (profits interest) of 20% of the profits earned on the assets under management.  Those profits are usually capital gains, and even though the "carry" is clearly compensation for services rendered and should be taxed at ordinary income rates like ordinary person's compensation is, the partnership tax rules have been interpreted to provide special characterization--not as compensation, but simply as a share of the types of income earned by the partnership.  The power of these highly compensated individuals and firms is so much that Congress has not been able to pass provisions undoing that treatment, after more than 4 years of consideration. (see various other posts on carried interest here on these issues.)

The capital gains boondoggle was extended under Bush to apply to the dividends corporate shareholders receive out of the earnings of corporations.  Those used to be taxed the same as interest, at ordinary income rates.  But since 2003 most corporate dividends--even those from foreign corporations-- have been taxed at the preferential capital gains rates under section 1(h)(11).  The extender legislation passed in December 2010 extended that provision as well.

One lobbying group is working to see that this unfair preferential rate for capital gains and dividends is eliminated (as was attempted in the 1986 tax reform act).  It is a group called "Responsible Wealth", which describes itself as a "network of 700 business leaders, high-wealth, and high-income individuals advocating for progressive tax policy and corporate accountability" and is supported by United for a Fair Economy.  Here's their pre-release on the  campaign on capital gains rates.

Upper-Income Taxpayers Call for Higher Tax Rates on their Investment Income

Boston, MA (April 1, 2011) –   As Congress wrestles with budget cuts of $33 billion or more, and states across the nation struggle with the loss of federal aid to states, one group of high-income individuals is stepping up to be part of the solution.

On Thursday, April 7, 2010, Responsible Wealth will be launching its new campaign to focus attention on a special treatment in our tax code that rewards income from wealth over income from work.  As part of this educational campaign, Responsible Wealth and its parent organization United for a Fair Economy (UFE) have created a new, interactive tax calculator that estimates the tax savings individuals and families receive from the special treatment of capital gains and dividend income, along with their savings from the income tax cuts enacted under President Bush in 2001 and 2003. 

The new calculator will be launched on Thursday, April 7 and will include graphic and interactive features.  Supporters who use the tax calculator will have the option to take the Tax Fairness Pledge, pledging all or a portion of their tax savings to groups working to promote a more progressive tax system.

Responsible Wealth, a project of United for a Fair Economy (UFE), is a network of 700 business leaders, high-wealth, and high-income individuals advocating for progressive tax policy and corporate accountability