Wednesday, August 3, 2011

Talking Taxes

The debt crisis in Washington included a lot of talk about taxes, with the Republicans, driven hard by the influence of the Tea Party, steadfastly refusing to allow an increase in taxes to reduce the deficit. The main argument being that, if business owners pay more tax they will not be reinvesting that money by expanding or hiring. That argument made a good sound bite and had a lot of people, mostly Republicans, convinced. There was, however, something about it which kept bothering me. 

They kept using the term “business owners”, which conjures up mental images of people running relatively small businesses. It is true that this group is important because they generate many of the new jobs each year and their spending is important in stimulating the economy. There is, however, another group covered by the term “business owners” that our Republican representatives do not talk about very much. That group is the large businesses and corporations. On the surface of it the idea that if they have to pay more in tax they will have less money to create new jobs and hire more people sounds solid. But, is that really true?

That question kept bothering me, so I picked up the phone and turned to the internet to do some checking for myself. What I found disturbed me. It turns out that most of the “wealthiest Americans”, including the big corporations, do not pay “their fair share” of taxes. In fact, while the United States has one of the highest tax rates in the world for this group (35%), the truth is they pay far less. One government agency estimates that the average tax paid by corporations reporting over a million dollars a year in income, after deductions, tax shelters, overseas “diversions” and etc…,is closer to 9%, with many very large corporations paying nothing at all in U.S. tax. Microsoft, for example, has its overseas subsidiaries license software to its US parent company in return for handsome royalties that get taxed at lower overseas rates. Exxon limits its tax pain with the help of 20 wholly owned subsidiaries domiciled in the Bahamas, Bermuda, and the Cayman Islands that shelter cash flow from operations in the likes of Angola, Azerbaijan, and Abu Dhabi. As a result, of the $15B it paid in income taxes last year, Exxon paid none of it to Uncle Sam, and has tens of billions in earnings permanently reinvested overseas. Likewise, GE has $84B in overseas income parked indefinitely outside the US. Of it’s over $14 Billion in profits last year, General Electric did not pay one dime in tax here in the United States. In fact, if it had not opted to take it as a credit against future tax liability, they would have gotten over $500 million in refunds from our government!

Looking at all these numbers, aside from generating one hell of a headache, made it clear to me that one thing Washington needs to do is clean up the tax code and close some of those loop holes that let these guys get away with that stuff. You can imagine how happy I was when I saw the Republican bill in the Congress addressing this very thing. I was happy, that is, until I read the bill and discovered that the tax loop holes they were discussing were not those effecting the large corporations but were those effecting most middle class Americans –things like your mortgage deductions (wow, wouldn’t that help the housing market).

Why don’t they get it? Why do our elected representatives not want to make the big corporations share the burden of fixing the debt crisis in Washington? The answer, my friend, is simple. They do get it -and the explanation can be illustrated very well by a comment made to me by an old buddy, who is now a senior corporate official with Exxon, made to me while we were discussing this stuff. I caught him on the phone while he was enjoying some good wine following his dinner. He said: “Do you know what the current joke around the water-cooler is? The economy is so bad Exxon may have to lay off 25 Congressmen.” –In vino veritas…..

Oh, speaking about taxes, here is an interesting historical tidbit. Abraham Lincoln is known for freeing the slaves, ending slavery and saving the Union. What is not widely known is that 150 years ago, on August 5th, 1861, he was also responsible for the first federal income and property taxes. When he signed the bill into law he assured the country that is was a strictly temporary measure to pay the war expenses

Oh, and speaking of history, today marks another first. 150 years ago today, off the coast of Virginia a Union naval officer ascends in a tethered balloon to look at Confederate controlled Hampton Roads. It is the first balloon ascent from a ship in naval history. -Now, aren't you glad you took the time to read that?

Vive diu prospere (live long and prosper)....

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