Tax Loopholes– Corporation, Business, Special Interest..: Red Herring– Shifting Burden, Avoiding, Dodging– Political Reality…

The precise point at which tax deductions become– tax loopholes or tax incentives become– subsidies for special interests is one great mystery of politics. ~John Sununu

U.S. corporations, businesses– like many U.S. citizens– exploit every available rule in the tax code to minimize taxes they pay: These are tax deductions, incentives or loopholes… also known as tax expenditures, in the arcane lexicon of budget experts. Tax expenditures have grown significantly since early 1990s, which is a consequence of increasing demand for government programs coupled with resistance to raising taxes. Last year they added up to more than 7% of the nation’s economic output; sizable figure considering that all federal taxes took some 15% of the economy.

The term loophole is derived from loupe which refers to a narrow opening in a wall. This slit-like window or loophole was located in medieval castles, and used to deflect incoming projectiles… According to Eric Epstein; modern-day corporation, business and many other groups exploit loopholes to deflect tax burden. Tax loopholes are provisions in tax law that removes income or assets from taxable situations into ones with either lower taxes or no taxes at all without directly violating law.

According to Eric Toder and Donald Marron; spending-like exclusions or loopholes increases size of the federal government by about 4% of gross domestic product; that’s about $600 billion in hidden spending through tax code, last year alone.

According to Eduardo Porter; just because some tax breaks are inefficient and misdirected does not necessarily mean that the goals they serve are unworthy… it only means there may be more effective ways to achieve government objectives. Utilizing loopholes isn’t breaking law, but circumventing it in a way that was not intended by regulators or legislators that put the law or restriction into place.

However with the fiscal crisis, it’s important to begin an open debate about the purpose, efficacy, and cost of many tax loopholes… But, that is not the same as simply looking for loopholes to close: It’s a debate about purpose of government and how best to achieve its goals…

In the article Big Corporations Use Loopholes by Jia Lynn Yang writes: Many large U.S. companies pay no federal taxes– or even make money through credits and refunds from the government by using an array of tax loopholes and tax breaks… A report by ‘Citizens for Tax Justice and Institute on Taxation and Economic Policy’; examined finances of 280 corporations from 2008 through 2010 and found; 30 paid zero taxes or used loopholes to wind up with negative tax rates. Under the federal tax code, corporations are supposed to pay 35% of their profits in taxes.

But the study found many of the companies used legal tax breaks that allowed them to pay lower rates than ordinary Americans. Powerful business lobby groups, such as; ‘Business Roundtable’, have said they want lawmakers to lower the overall 35% tax rate in exchange for closing some loopholes. Lobbyists frequently cite this rate when arguing that U.S. firms pay more than foreign competitors. Some corporations pushed back at the report, saying it relied on fuzzy accounting.

The report said that 71 of the companies paid effective rate of more than 30% over the three years. But roughly equal number paid less than 10%. The range between industries is wide: Retail and health-care companies, in particular, tend to pay more taxes. These firms usually have less intellectual property that can be shifted overseas to take advantage of other countries’ lower tax rates. The report found they paid an effective rate of 30% over the three years. By contrast, tech companies and manufacturers paid far less…

In the article What You Can Do About Corporate Loopholes by Robert Broens writes: While the official U.S. statutory corporate income tax rate stands at 35% the Government Accountability Office (GAO) estimates effective tax rate is 25.2%. This 10 points difference makes U.S. tax rate competitive with other developed nations. The U.S. Congressional Budget Office (CBO) estimates that U.S. corporate tax receipts for 2011 came in at $181 billion. Using the 25% effective tax rate estimate from the GAO this means U.S. taxpayers are missing out on an annual $71 billion in tax receipts.

There are many loopholes for corporations and cost estimates for the tax payer that fluctuate wildly. The following is just a small overview of the most important and bizarre loopholes: One of the most important loopholes is the deferral of income from foreign controlled corporations. U.S. corporations can leave profits abroad and can defy paying U.S. taxes until they transfer those profits back into the U.S. (repatriation). ‘Credit Rating Agency Moody’s’ estimates corporations hold some $1.2 trillion in cash balances– and stored some $700 billion overseas.

Other loopholes include: Companies can deduct punitive damages (or settlements) from their income; flexible ways of accounting (mostly LIFO inventory system); modified accelerated depreciation schemes (corporate jets can be depreciated faster than commercial airline)… Estimates are 83 out of the top 100 U.S. firms have shell companies in offshore locations with the sole purpose of tax evasion…

On average the 280 companies investigated, in the report of ‘Citizens for Tax Justice’, paid an effective tax rate of 18.5%, or $251 billion in corporate taxes on their reported profits of $1.35 trillion for the three-year period of 2008-2010. When, they should have paid almost double that amount. In 2011 U.S. Federal income tax receipts totaled some $181 billion according to the CBO. The 280 companies, in the report of ‘Citizens for Tax Justice’, paid $85 billion in corporate taxes in 2010 on nearly $488 billion in earnings, for an effective tax rate of 17.5%, half of what they should have paid.

Just this sample of 280 companies should have paid around $170 billion in taxes– somewhere they found $85 billion in loopholes. While there are valid arguments that a tax rate of 35% is very high, their effective tax rate is 17.5%, which implies that small and medium businesses pay a much higher tax rate as their effective tax rate is estimated at 25.2%. Some of the reasoning is that these companies do not have access to expensive consultants, accountants or foreign shell companies…

This is crucial as economists agree that small and medium businesses are critical for getting employment growing again. This distorted tax code creates competitive advantages for the largest corporations and impacts the market place in a severe manner. Clearly, there is room for tax reform…

In the article Corporate Tax Giveaways–Outcry–Profit! by Suzy Khimm writes: Pundits on both left and right were outraged when they realized a whole flotilla of corporate tax giveaways were buried in the fiscal cliff deal; ranging from a tax break for race-car track owners to electric-scooter makers…

According to Matt Stoller; surely a modest hike in income taxes for people who make more than $400k in income would be worth trading-off for the few hundred billion dollars in corporate pork. This is what the fiscal cliff is about – who gets the money…

According to Tim Carney; tax breaks that came out of Senate legislationattracts lobbyists like a raw steak attracts wolves... But the animus against the narrowly targeted tax breaks, known as ‘tax extenders’, could actually help corporations in their effort to land a much bigger prize, than temporary giveaways, i.e., comprehensive corporate tax reform. Neither party, actually, likes the current tax system for corporations, which is riddled with too many loopholes and complexities, and both agree that it should be simplified by eliminating many tax loopholes…

At the same, both parties have promised that such reform would also be accompanied by significant cuts to the corporate tax rate… Republicans want to lower tax rate to 25% and White House says 28%. A comprehensive overhaul would also deal with overseas earnings, paving way for corporations to make the case for transition to territorial tax system that would eliminate taxes on foreign income– holy grail– for multinationals. Both Republicans and Democrats seem to agree that the package should be ‘revenue-neutral’— i.e., overall tax burden on corporations would be the same, just enacted through a tax code that would be simpler and more efficient….

Closing corporate tax loopholes, for sure, sounds good… So good, in fact, that politicians talk about it all the time. According to some experts; loopholes are gaps in tax law that corporations exploit against law’s intent, while others say; that is not the case...

According to Eric Toder; most tax proposals are not loopholes, but incentives… According to David Barrett, CPA; tax professionals work within the tax code to find the best options for their clients to pay least amount of taxes that are legally required. As for tax code, it’s more than 4,000 pages and ever-changing; it’s incomprehensible to the average taxpayer, and so complex that it’s accompanied by 10,000-page document to decipher it… all of that contributes to some of the so-called loopholes.

According to Lougen Valenti; the concept of loopholes is somewhat of a myth– much of this talk is politically driven. What we do for clients is tax planning and giving business advice, not tax loopholes. We help clients plan and use the law to advantage, and contrary to the idea that wealthy clients are simply beating the tax person. Proper tax planning frees up funds for investment, for example; expanding business, hiring employees, investing in product development.

A common  misconception is tax-saving opportunities are only available to the wealthiest… there are countless small businesses that are able to thrive because of tax-saving options available to them. Also, there are plenty of deductions for individual taxpayers, in the middle class, as well. Even though there is little agreement on the level and scope of taxation in U.S.; nearly all participants in the tax debates agree that the system needs fundamental reform–making the system fair, more understandable, easier to navigate…

However, one thing remains clear; the kind of corporate tax reform that both political parties are proposing is ‘revenue-neutral’, i.e., off-setting tax rate by closing loopholes and expenditures; but, that isn’t going to reduce the deficit…

According to Scott Rasmussen, pollsters, says 80% of Americans would favor a simpler tax code, with lower rates and fewer deductions, e.g., flatter, fairer, broader-based system for individual and corporate income. The idea has proponents even among politicians, although it’s fair to wonder whether they actually have the will to act…

Deductions or loopholes are granted to favored groups and those groups, in turn, lobby members to retain, extend or expand their favors: As circles go, it’s not always most virtuous: People are not powerless– they decide who serves in Washington DC; and until they make it clear on– what they want– they get government they deserve.