“Shameful” Interpretation of GAO Report Used to Mislead The Country
Last week, the news repeated a Congressional report that the vast majority of corporations were making enormous profits, yet paying absolutely no taxes. The misleading commentary served as the starting point for proposing a corporate tax increase. Unfortunately, a complete and proper explanation of the facts was never offered. Examples like this support the saying “Figures lie and liars figure.”
This last week, news papers, radios and televisions across the U.S. reported that corporations were not paying taxes that the reports implied should be owing under any sense of fairness. The following report from Associated Press (AP) is representative:
“Unlike the rest of us, most U.S. corporations and foreign companies doing business in the United States pay no federal income tax, according to a new report from Congress. The study by the Government Accountability Office, expected to be released Tuesday, said two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005. … "It's shameful that so many corporations make big profits and pay nothing to support our country," said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.”
Dorgan’s announcement also said:
“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... It's time for the big corporations to pay their fair share.”
Predictably, rants on the blogosphere and in news coverage consistently bemoaned how terrible it was that this thievery was being allowed, and that law changes were needed.
What’s really shameful is Congressmen Dorgan’s and Levin’s mis-use of the GAO report to make up new conclusions. Equally shameful is the related news coverage, which made no independent investigation of what the report actually said, or what explanation might really exist for this data.
The actual GAO report compared the U.S tax liabilities of U.S.- vs. foreign-controlled corporations. The primary issue involved the complex question of transfer prices used by multinational corporations. However, in the statistical appendixes that accompanied the report, the GAO included additional information that was probably added to provide overall context, even though it had nothing directly to do with the rest of the report’s conclusions. The additional information included (i) all S-Corporations, and (ii) C-Corporations that lost money. These two categories created the “news” that corporations are not paying any tax.
S-Corporations are privately-held companies that are usually small businesses. Income or losses from an S-Corporation are passed through to its shareholders who must report the income or loss on their individual income tax returns. This is similar to the tax treatment that occurs for partnerships and sole proprietorships. There is nothing clandestine about this reporting, which has been allowed for decades.
With this background in mind, an equally accurate interpretation of the data that grabbed headlines could alternatively be “Small businessman pay their fair share of taxes on their personal tax returns.” Of course, this “news” would not have provided the sponsoring congressmen with any press coverage, and would be widely viewed as boring.
ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials, CPA, MBA, CMA and ASA.
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