Corporate Tax Study Stirs Up Controversy

A recent study on corporate tax payments has been making waves on the Internet and in Washington in the past week.

The study in question, from the Government Accountability Office, actually dealt with a comparison of the reported tax liabilities of foreign- and U.S.-controlled corporations between 1998 and 2005, but it also pointed out the surprisingly sparse contributions of both types of companies. The report found that two-thirds of both American companies and foreign companies doing business in the U.S. end up avoiding all income tax obligations to the federal government despite sales of $2.5 trillion (see Most Companies Don’t Pay Federal Taxes). From 1998 to 2005, an average of 68 percent of foreign companies doing business in the U.S. paid zero income taxes and 66 percent of U.S. domestic corporations paid no federal income taxes.

That seems in sharp contrast to recent reports that the U.S. imposes too high a tax rate on companies, hurting U.S. competitiveness against other industrialized countries. Not long ago, the Treasury Department issued its own data to back up those claims (see Treasury Wants to Cut Business Taxes). Now that the IRS has released its latest Statistics of Income Bulletin, it too has effectively waded into the matter by highlighting the tax receipts of foreign-controlled domestic corporations (see Foreign-Controlled Companies Contribute to Revenue).

All these contrasting statistics have been more than a little head spinning, not to mention the various claims that have been circulating from advocacy groups and bloggers with their own spin on the statistics. For instance, the Associated Press was taken to task in some quarters for apparently misinterpreting some of the tables in the GAO study, forcing the AP to issue a correction.

But still the question of raising or lowering corporate taxes isn’t going to get any less controversial no matter how many studies the government issues. As we witness the charges and countercharges that have been flying in the past week over some of the tax proposals that the Obama campaign recently detailed, tax policy is a favorite subject of debate, whether they’re business or individual taxes, or both.

Transfer pricing is helping many companies that do business internationally to move around their tax obligations to the least taxing nation, and that trend is likely to continue. Just as tax preparers always try to find the most favorable deductions for their clients, so corporate tax departments look for the most advantageous conditions as well.

But as losses mount this year among many companies affected by the economic crisis, particularly in the banking and real estate sectors, we are likely to see many of them claiming wide-ranging deductions that could stretch out for years. That trend is going to hit the budgets of many government entities considerably harder than transfer pricing maneuvers ever will.

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