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Abuses Aside, Corporations Are Paying Their Tax Bills.

The Department of the Treasury's campaign against corporate "tax shelters is attempting to convict corporate America of massive tax abuse. But the politicians and media commentators have their facts lined up at the wrong angle -- companies are paying their way.

Corporate gross income tax collections in fiscal 1999 increased by $3 billion. It was only due to a $7-billion increase in refunds of taxes (presumably from prior years' returns) that net collections declined in the same period. In today's healthy economy, when corporations are profitable and reporting growing earnings, more are able to utilize pent-up tax credits (such as AMT tax credits). Corporations shouldn't be hounded for taking appropriate and legitimately earned tax credits.

Many inside the Beltway wield maligned statistics and anecdotal evidence to conclude there's at least a $ 10-billion annual revenue loss due to tax-avoidance schemes. Treasury puts the blame on declining corporate tax receipts squarely on abusive practices, without quantifying to what extent. Last November, Jonathan Talisman, Treasury's acting assistant secretary for tax policy, admitted before the House Ways and Means Committee, "It is unclear how much of the divergence between [corporate] tax and book income reflects tax shelter activity." What's needed at this point is a rigorous analysis of variances between recent corporate book earnings and tax receipts, data only Treasury can provide.

Doing something about corporate tax shelters has a certain rhetorical appeal, but an analysis of actual data shows no evidence of a loss of corporate tax revenues attributable to shelter activities. Since 1992, corporate federal income tax payments have grown by more than 80 percent, from $100.3 billion in fiscal 1992 to $184.7 billion in fiscal 1999. By point of comparison, GDP has grown by 44 percent over this period.

According to Congressional testimony offered by Kenneth Kies, a tax expert with PricewaterhouseCoopers and former chief of staff of the Joint Committee on Taxation, effective tax rates for corporations have been flat or rising over the past five years. Mr. Kies concludes there's been no drop in corporate tax liabilities relative to pre-tax corporate income in recent years.

The difference between a corporation's publicly reported financial statement income and its federal taxable income can be attributed to any number of factors. Examples include research and development tax credits, foreign income, nondeductible book accruals and tax carryover benefits.

While Secretary of the Treasury Lawrence H. Summers says Treasury has no quarrel with the desire of companies to minimize their tax burden by legitimate means, he is perpetuating an environment of uncertainty where corporations could be penalized retroactively for practices which formerly were legitimate. This has created more uncertainty and ambiguity in complying with the tax law, while simultaneously imposing potentially excessive sanctions for failing to do so.

We encourage the Department of the Treasury and the IRS to develop more comprehensive, clearly defined parameters to help curtail these practices. Far too much effort is expended in tax court wrangling over what is and what isn't allowable. Illegal practices should be shut down, and the offenders penalized. But a clear path must be made for bona fide business transactions.
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Author:Livingston, Phil
Publication:Financial Executive
Article Type:Brief Article
Geographic Code:1USA
Date:May 1, 2000
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