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Corporate Tax Dodging: the American Way

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We all know that companies like eBay and General Electric pay huge salaries to their CEOs, but you may be surprised to learn that some of these top executives actually make more than their companies shell out in federal income taxes. A new report put out by the Institute for Policy Studies (IPS), finds that of the 100 highest earning companies, 25 paid their CEOs more last year than they spent on federal income taxes. 

 These CEOs made an average of $16.7 million in 2010, nearly a two-thirds increase over the $10.8 million average in 2009. When it came to paying federal income taxes, many of the 25 companies collected tax refunds, averaging $304 million. 

IPS Report

The new report, titled “Executive Excess 2011: The Massive CEO Rewards for Tax Dodging,” has been criticized by some (notably by many of the companies singled out for their high executive salaries) for failing to consider state taxes and back taxes paid in 2010. Still, the report’s authors argue that the findings highlight a growing disparity between corporate management incomes and those of average workers. 

To keep their taxes low, the nation’s largest companies have a few tricks up their sleeves. The report points to tax dodging as an often legal, but ethically questionable, way to ensure higher profits. Companies offshore profits to tax havens, foreign countries where taxes are levied at lower rates, or not at all. By operating shell companies or subsidiaries in these countries, companies can take advantage of the benefits afforded to US businesses and funded by corporate taxes, without actually having to pay the taxes themselves.

Financial Games

But while the upper echelon rakes in huge salaries, average worker salaries have stagnated and unemployment remains high. The report points to several sobering statistics to illustrate the disparity between the rich and everyone else. Among S&P 500 companies, the average CEO salary has increased by 27.8 percent since 2009, but average earnings for company employees have risen by only 3.3 percent. Put another way, the gap between CEO wages and those of average workers was 263 to 1 in 2009. In 2010, that ratio had reached 325 to 1. Maybe include a comparison to a time when wages were more equal?

What are CEOs being rewarded for? The report argues that top executives are rewarded for their ability (and willingness) to aggressively avoid taxes, benefitting company profits and shareholders, if not employees as a whole. Aside from their own paychecks, the profits made by tax avoidance are funneled into lobbying and campaign donations; two strategies to ensure that corporate taxes are low and regulation light.

Who’s to Blame?

While it’s easy to point fingers at corporations for their tax avoidance behavior, it’s important to remember that it’s not just CEOs who are being rewarded for dodging the intent, if not the letter, of the law. Politicians must be willing to leave open the loopholes that allow corporations to dodge taxes. 

Companies like Citigroup and Bank of America run 427 and 115 subsidiaries in tax havens respectively. These practices are all perfectly legal, thanks to the unwillingness of the House and Senate to impose stricter regulations. It’s a safe bet that campaign donations and sweet-talking lobbyists go a long way toward fueling political complacency in corporate treatment by the government. Corporate executives may be motivated by greed and self interest, but many politicians don’t lag far behind. 

Legislation passed in September 2007 aims to create more transparency on the lobbyists’ influence in Washington.  The Honest Leadership and Open Government Act (HLOGA) placed new restrictions on lobbyist’s activities, as well as requiring quarterly disclosure reports on the part of organizations and the lobbyists they employ. The fine for failing to correct a defective disclosure report within 60 days of notification? Up to, and not exceeding, $200,000. Barely a slap on the wrist for corporations averaging global profits of $1.9 billion.

The Dodd-Frank Financial Reform Law, signed by President Obama in July of 2010, requires companies to disclose CEO salaries and median employee salaries (calculated excluding the CEO). The law also requires companies to express the relationship between financial performance and CEO salary, putting high-paid CEOs in the hot seat if companies perform poorly. 

Progress, or More of the Same?

With the new IPS report highlighting the extent of corporate tax dodging and astronomical CEO salaries, it might be worth pausing to ask ourselves if attempts at corporate regulation are working. 

The Securities and Exchange Commission (SEC), is responsible for enforcing the regulations that, in theory, keep corporate tax-dodging in check. With passage of the Dodd-Frank Financial Reform Law, the SEC’s responsibilities have greatly expanded. Its budget, unfortunately, has not. This summer, the appropriations committee opted to keep the SEC’s budget at last year’s level of $1.19 billion, denying a request for an additional $222.5 million to help cover increased SEC responsibilities. 

Ironically, this cut to the requested budget will save money for Wall Street, not taxpayers, since SEC funding comes from the fees it levies.  Additionally, a frequently overlooked provision in Dodd-Frank stipulates that the SEC may not levy fees in excess of its own budget, so here again, corporations win out.

The increased corporate regulation brought by the Dodd-Frank Reform Law will serve only as well as the SEC is able to enforce it. In the meantime, dodging Uncle Sam continues to be big business for corporations, and politicians are standing by as working class Americans get taken for a ride. 

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  • Glenn Contrarian

    But don’t forget – we’ve got a terribly, terribly high corporate tax rate, as the Republicans keep trying to remind us that it’s the second-highest in the developed world.

    And while it is true that we DO have the second-highest NOMINAL corporate tax rate in the developed world, after all the tax breaks and subsidies are taken into account, we’ve got the second-LOWEST effective tax rate in the developed world.

    And what do the BC conservatives do whenever I point this out? They stay silent or the change the subject, just as they do when I point out that American taxpayers have a lower overall tax burden than they’ve had for fifty years, lower than under Eisenhower, Nixon, Reagan, Bush, or Bush.

    They’re okay with the rank hypocrisy and the utter falseness of conservative leaders when it comes to taxes, just so long as they can get rid of the Marxist/socialist/Nazi Kenyan-born black guy in the White House. They dare not demand fact and honor (as opposed to hypocrisy) from their elected conservative leaders…because if they did, they’d start becoming liberal…

    …which is why I was once a Republican and am now a proud liberal

  • Glenn Contrarian

    And here’s a cartoon that applies.

  • http://www.lunch.com/DrJosephSMaresca Dr Joseph S Maresca

    An inescapable flat tax could be helpful. The alternative minimum tax sought to establish a taxation floor. Currently, the government is attempting to encourage more hiring through targeted reduced taxes. Tightening of some classic tax havens could be beneficial.