Joe Biden says something worrying in an interview with the New York Times. As if he actually believes this nonsense:
A generous stimulus will actually generate economic growth without long-term fiscal harm if in the future “everybody pays their fair share, for God’s sake,” he insisted. “And by that fair share, I mean there’s no reason why the top tax rate shouldn’t be 39.6 percent, which it was in the beginning of the Bush administration. There’s no reason why 91 Fortune 500 companies should be paying zero in taxes.”
This is nonsense of course, for there’s excellent reason why a company should be paying zero in taxes. That it hasn’t made a taxable profit being the most obvious one.
The tagline, the meme, comes from this report.
Nearly 100 Fortune 500 companies effectively paid no federal taxes in 2018, according to a new report.
The study by the Institute on Taxation and Economic Policy, a left-leaning think tank, covers the first year following passage of the Tax Cuts and Jobs Act championed by President Donald Trump, which was signed into law in December 2017.
The report covers 379 companies from the Fortune list that were profitable in 2018 and finds that 91 paid an effective federal tax rate of 0% or less. Those companies come from a wide range of industries and include the likes of Amazon, Starbucks and Chevron.
That, in turn, stemming from this report.
At heart this is simple idiocy. What gets reported as a profit to shareholders isn’t the same thing as the profit that gets reported to the taxman. Which is why x% of profits as a tax bill doesn’t match the y% which is the corporate income tax rate.
It is, of course it is, possible, theoretically at least, to make these the same. All that would be necessary is to declare, in the tax law, that tax is paid on GAAP (or whatever it is, IFRS etc) profits. Use the same calculation for tax as shareholders do. The reason this isn’t done is because it doesn’t allow politicians to scalp companies in the way that they currently do.
In more detail the report about taxes to be paid, rates handed over and all, fails because the people writing it don’t understand tax in the slightest.
ITEP’s examination of Fortune 500 companies’ financial filings identifies 379 companies that were profitable in 2018 and that provided enough information to calculate effective federal income tax rates, which is the share of 2018 pretax profits they paid in federal income taxes in that year.
That is never, ever, going to work. Corporate income taxes are paid in arrears. Yes, there are prepayments but the balance is always paid in arrears. For the obvious reason that you don’t actually know what full year profits are until you’ve gone past the end of the financial year and then sat down to work out what the profits are.
Therefore cash taxes paid this year are really taxes paid on last year’s profits. Or, if we wish to get sophisticated about it, the balancing sum for last year’s taxes, the estimated payments for this and without the balancing item for this year’s taxes due. The numerate should be able to see what happens here.
A swiftly growing company will have a cash taxes paid number substantially below the headline corporate income tax rate. Simply because this year’s profits are higher than last year’s. This being our useful definition of a swiftly growing company.
It will also be true that a shrinking company, or one that falters, will have a higher than headline rate in the year that it does falter. The joy of this point being that we can in fact see this in certain accounts. From memory Apple had one of those faltering years – still made a gonzo profit but it was less than the year before – and that cash paid tax rate did indeed leap.
So our basic measure being used here fails on simple ignorance of how the system works grounds.
There is a further problem of course. They’re trying to measure federal, US, taxes paid only. But that’s not how a company gets taxed. Rather, there’s that – and yes, the details here get complex – profit made, the tax bill due, from which foreign taxes already paid get deducted. If France is charging Apple some sum then that becomes an allowance against the US tax bill – roughly, sorta, and not always in every pure and perfect detail.
The method of counting being used here simply isn’t fit for purpose. Of course it isn’t, as it’s largely the method that people like Richard Murphy use, always a decent signal that. You know, a perfect market of ignorance and innumeracy.
Things do in fact get worse.
For then we come to the description of how and why such tax bills are lower. First up – and they’ve listed them in what they think is the order of importance, top of the list accounts for more than the bottom of it – is depreciation:
Full expensing of capital spending
The tax laws generally allow companies to write off their capital investments faster than the assets actually wear out. This “accelerated depreciation” is technically tax deferral, but as long as a company continues to invest, the tax deferral tends to be indefinite.
Given that we generally like companies to be investing a part of the system that encourages them to invest might not be our largest problem ever. But more than that the claim itself, that this is a tax break, is mind gargling stupidity.
Start from the beginning again. Tax is due on profits. Profits are revenues minus costs. Costs are going buying things – workers, machines, raw materials etc – with which you make stuff to sell in order to gain the revenue. It’s a fairly simple concept despite the complications of the details.
If you go buy something that you can use for several years to produce stuff you don’t get to claim all of that cost in that year you spent the money. You are forced to “depreciate” the asset – an asset is, pretty much by definition, something you’ve got to depreciate rather than take the deduction of the cash spent in that year of spending it. Roughly, very roughly, if the asset lasts 5 years (a nice big truck to take stuff to the buyer) then you can put 20% of the cost as a cost each year. You might have spent the money in year 1, but as a part of costs allowed against revenues before profits, then tax, are calculated you get the same percentage of the asset as 1/life of asset each year.
This is so that the politicians get their money upfront. Over time the tax will be the same – OK, there are details about cashflow that differ but they’re not important here – but in a system with no forced tax by depreciation the deduction is taken in year one. In a system with it it’s taken bit by bit. The same deduction is taken, the same amount of tax is paid, all that changes is how early the politicians get the cash.
Accelerated depreciation, the thing being complained about here, is just abolishing that rule again. Take the full deduction for expenses in the year the expenses were made. This isn’t a tax break. It’s not a subsidy. It’s a reversal of the acceleration of the tax bill.
So these laddies are talking pure bollocks again.
Then there’s this, their second massive corporate tax break:
Most big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. Corporations deduct the value of stock options just as they deduct the value of any compensation to employees, but the tax rules make this particular form of compensation a golden opportunity for tax avoidance. The value of stock options is the difference between the agreed-upon price at which the employee can purchase stock and the price at which the stock is selling on the market. For example, if an employee receives options to purchase a certain amount of stock for $1 million and will exercise that option at a time when that amount of stock is selling on the market for $3 million, the value of the options is $2 million.
The problem is that when a corporation deducts that value for tax purposes, they calculate it in a way that generates a much larger figure than the actual cost to the corporation, which they report to investors.
Accounting rules require a company to, at the time a stock option is granted to an employee, estimate the value of that option on the date it will be exercised, which is difficult to predict. Unlike the accounting rules, the tax rules allow the company to wait until the employee exercises the option, which could be several years later, and claim a tax deduction equal to the value of the stock option at that time, which can be much larger than the value reported to investors.
So, the company grants options to Mrveryimportantexecutive. The future cost is unknown but can, as they say, be estimated. As it happens most such are granted at the current stock price. If they’re not then the employee owes income tax on the embedded value right then, years before they can exercise the options to pay the tax bill. This is what screwed Steve Jobs at Apple, the grant of in the money options. But, clearly, the value of the options at exercise time can be different. And it is the company that has to pay that value at exercise time. They’ve got to provide the stock to give to the employee after all. They might buy it on the market, which is clearly a cost. They might issue new stock, which has an opportunity cost of the market price. The cost to the corporation of the stock options is the value at exercise that is. Therefore, that’s what is the allowable expense against the tax bill.
There’s not even any tax dodging here. The recipient of the stock then pays income tax. That may well be higher than the corporate income tax not paid – there’s no leakage from the tax system here anyway.
They do have one bit right:
Industry-specific tax breaks
The federal tax code also provides tax subsidies to companies that engage in certain activities. For example: research (very broadly defined); drilling for oil and gas; providing alternatives to oil and gas; ethanol production; maintaining railroad tracks; building NASCAR race tracks; and a wide variety of activities that special interests have persuaded Congress need to be subsidized through the tax code.
Well, yes, which is why there’s that attraction to having tax paid not on the rules that the politicians write. Not that that will be accepted as a point but there we are.
Now, sure, we know that this whole report is nothing but propaganda. It’s just some rubbish to gee up the idiot progressives into thinking there’s some vast pot of corporate money they can go raid to build the New Jerusalem. But it does worry rather that the next President of the United States actually believes this shit.