Loopholes letting U.S. companies off tax free

This editorial appeared in the St. Louis Post-Dispatch

In 2005, corporate America turned a $1.6 trillion profit. Even by Sinatra standards, it was a very good year.

Why, then, did 25 percent of large American corporations pay no income tax — zero — that year?

Taxpaying Americans — scraping to pay their food, gasoline and medical bills — deserve an answer. If big companies sidestep the tax collector, the rest of us have to make up the difference in paying for national security, transportation, education and environmental protection.

Either that or we pump up the national debt and leave it for our grandchildren to take care of.

The startling 25 percent figure pops out of a new report from the Government Accountability Office. But wait — as the infomercials alert us — there's more.

Yes, 25 percent of large American companies paid no corporate income taxes in 2005. But the tax-free figure was even higher for foreign companies that operate American subsidiaries: 28 percent.

And 2005 wasn't exceptional. Between 1998 and 2005, 24 percent of large American corporations and 34 percent of foreign companies paid no income taxes in at least four of those eight years. These kinds of firms account for 90 percent of all corporate wealth.

The GAO report doesn't specify how so many companies are managing to avoid taxation. But the answer probably lies in the arcane rules — which include countless loopholes along with justified tax breaks — of corporate tax law.

The best accounting brains money can buy know how to massage numbers to make profits disappear from the American parts of businesses and reappear in operations of lower-tax countries overseas.

"If you're really clever, you can do it within the letter of the law," says Eric Toder, senior fellow at the liberal-leaning Tax Policy Center in Washington.

The result is an act of financial prestidigitation that allows companies to report the good news of profitability to shareholders and the bad news of losses to taxing authorities.

"It looks to me like the system is working the way it's supposed to," said Josh Barro, an economist at the conservative Tax Foundation. Most such companies are paying nothing because, tax-wise, they're showing no profits.

Most untaxed corporate profits eventually return to the economy. Those who own stocks, whether directly or through various kinds of pension plans, get a slice of them. But the fattest slices go to wealthy people with big investments.

Indeed, nearly half of all stock dividends, which are paid from profits, wind up with the wealthiest 4 percent of families, according to government figures.

Sen. Byron Dorgan, D-N.D., who requested the GAO report and who is a member of the Senate Appropriations Committee, is not happy about the results.

"The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hard-working Americans who pay their fair share of taxes," Dorgan said.

But some think corporations still pay too much in taxes. Sen. John McCain, the Republican presidential nominee, wants to cut the top corporate rate from 35 percent to 25 percent and add breaks for investment in equipment and research. With the federal deficit heading for half a trillion dollars next year, he might have trouble getting that through Congress.

In contrast, Sen. Barack Obama, the Democratic nominee, talks vaguely about closing "special-interest loopholes and deductions, such as those for the oil and gas industry."

It's hard to see any justification for additional corporate income tax cuts, considering that at least a quarter of the biggest companies already pay nothing. The system clearly needs an overhaul that would maintain incentives that truly contribute to the creation of jobs and a healthier economy, trash the special-interest tax breaks and see that profitable companies pay their share.