Throughout my long lifetime American politicians on the Left have used class warfare as a tool in their efforts to stir up class envy and gain votes. The formula is always the same -- create a hated straw man, attack it, then promise to right the mythical wrong. The theme is always "rich vs. poor," "corporations vs. the people," "them vs. us," "tax havens mean tax evasion" and so forth, ad nauseam.
No better example of this crass demagoguery can be found than the reaction of some of the Democrat Party's "leaders" to a recent Government Accountability Office study.
According to IRS figures, 72% of all foreign corporations doing business in America and 55% of all U.S. corporations paid no U.S. federal income taxes in at least one year between 1998 and 2005. During that same time period, 57% of foreign corporations and 42% of U.S. corporations paid no federal income taxes for two or more years, the GAO found. That led to an Associated Press story with the startling headline, "Most Companies in U.S. Avoid Federal Income Taxes,'' and to a frenzy of business bashing by leading Democrats.
Eh Gad! What a Scandal!
Eh gad! Corporations paying no taxes! What's this -- another nefarious plot by those greedy capitalists? While average, hard working taxpayers are left to foot the bill? Quick Congress -- do something!
Two of the left wing voices heard baying at the GAO's corporate no-tax moon were -- you guessed it -- U.S. Senators Carl Levin (D-MI) and Bryon Dorgan (D-ND) co-sponsors, along with Senator Barack Obama (D-ILL), of the bill S. 681, the "Stop Tax Haven Abuse Act," that would curtail Americans current freedom to invest and do business in 34 low-tax jurisdictions.
Like Claude Rains' gambling Inspector Renau in Casablanca, Senator Dorgan was shocked! Shocked!
He called the GAO conclusions "a shocking indictment of the current tax system". "It’s shameful that so many corporations make big profits and pay nothing to support our country. The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls," Dorgan said. "It’s time for the big corporations to pay their fair share."
"This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States," said Senator Carl Levin, the other half of the left's Punch and Judy Show.
The Wicked Liberal of the West, House Speaker Nancy Pelosi (D-CA), piled on too, arguing that the data revealed a fundamental unfairness in the U.S. system, and called for reform. "When two-thirds of corporations pay no taxes,'' Pelosi intoned, "American workers are forced to pay too much in taxes even as they cope with rising prices and falling wages.''
Sheer Nonsense
Unfortunately, the GAO study did not explain why so many corporations pay no U.S. taxes. The Tax Foundation found that among those companies, 85% of them also made no profits that year, so no taxes were owed. When all major U.S. airlines and General Motors, among many others, are losing billions, no taxes are paid. Duh!
The study focused on an IRS tax database that included millions and millions of companies. The vast majority of firms in the study were tiny "mom and pop" enterprises. Why did the tiny "mom and pop" enterprises pay no taxes? Because they didn't make any money! The study reported that was the reason about 80% of the firms in the sample avoided taxes in a given year.
For big corporations, the study disproves the Democratic attacks. The study found that about 75% of large companies (those with sales above $50 million) paid taxes in 2005, about typical for recent U.S. history. And those that didn't pay taxes in 2005 did so earlier, so almost no large companies went through the sample period without paying taxes.
Another Reason
The United States continues to impose the second highest combined federal-state corporate tax rate among industrialized countries at 39.3%.
The average European nation has tax rates on corporate income 10% points lower than the United States. Those countries also, on average, raise 50% more as a share of gross domestic product in corporate taxes; Ireland, with its 12.5% rate captures 3.4% of GDP, while the U.S., with its 39.3% rate only gets 2.5% of GDP.
For the 17th consecutive year, the average rate of corporate taxes in non-U.S. countries fell while the U.S. high corporate tax rate stayed the same. As a result, the overall U.S. corporate tax rate is now 50% higher than the OECD average.
Is it any wonder that American businesses go offshore where they can save on taxes, and that foreign corporations increasingly are avoiding American investment?
Last Word
Kevin Hasset, director of economic policy studies at the American Enterprise Institute says it all: "In other words, there was virtually no news in the GAO study. But that didn't stop the Democrats... Democratic politicians misused and misrepresented the results of this modest GAO study to bash America's corporations and call for sweeping 'reforms.' If they will do so in response to this minor document, one can only conclude that they will do so on the flimsiest of excuses. Leaders of the Democratic Party are so eager to portray American business as villainous that they will twist and distort facts in order justify even more punitive taxes than we already have."
For an interesting audio commentary on the GAO study by tax expert, Dan Mitchell of the Cato Institute, click here.
* If you would like to know more about business tax savings offshore that could benefit you, I tell all in my comprehensive book (288 pages) , Where to Stash Your Cash: Tax Havens of the World. Click here for more about this book.
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