TCS Daily


Enron Is Us, Part II

By Duane D. Freese - April 15, 2002 12:00 AM

"Reduce incomes for retirees," says USA Today editorial board contributor Ted C. Fishman. "Cut funding for charities," argues Newsweek's and the Washington Post's Allan Sloan. "Raise interest rates on home buyers," advocates Citizens for Tax Justice.

Have these folks gone crazy? Well, if they said those things, most people would think these so-called advocates of the average investor and taxpayer had lost their bearings.

So, to put your minds at ease, they didn't actually utter the above quotes. No, instead, they did what comes naturally to liberal commentators and advocacy groups - they bashed corporations for tax avoidance, which today more than ever may amount to the same thing.

Citizens for Tax Justice kicked off the annual slugfest last month, declaring that "The big corporate tax cut bill just passed by Congress and signed by President Bush will slash corporate income tax payments this year to their lowest level as a share of the economy since the early Reagan administration. This will be the second lowest level in the past 60 years."

Newsweek's Wall Street editor, Sloan, then weighed in with an April 9 column, "Corporate Tax-Avoidance Moves Are Hardly Patriotic."

He wasn't so much upset by new tax cuts but by corporations making use of old loopholes. Specifically, he targeted Stanley Works, the toolmaker, for setting up its headquarters in Bermuda to avoid corporate profits taxes, and Bank of America Corp. for an apparently legal double deduction.

"So what if our country is at war against terrorism and is spending billions extra for defense and homeland security? That's our problem. The tax dodgers' problem is raising profits to get their stock price higher. What could possibly be more important, since a good stock market is good for America, right?"

Fishman, in an April 10 USA Today piece, brought the patriotic theme home, In "Taxpayer patriotism sets sail," the contributing editor to Harper's Magazine and Worth attacked "the black arts of tax avoidance," led by corporations "building mazes of offshore corporations and partnerships," like those of Enron.

These, he intoned, set a bad example: "When it comes to paying taxes, inspiration isn't drawn from firefighters ... or from soldiers. ... The tax world's heroes are the companies that beat it. When firms reduce their taxes to nothing by all means possible, they are doing what they were designed to do: serving shareholders. Amorality is a virtue. Less aggressive firms are seen as failing investors. ... So why wouldn't Americans want the same things for themselves that they want in the companies they work for and invest in?"

His answer: "Corporations are not charged with realizing the shared duties of civic life; citizens are. When taxes become a game in which we all try to make the other guy pay, we will lose our honor system altogether. Or rather, we trade the grudging honor of paying for what we all share for another communal ethos: honor among thieves."

Fishman has got one thing almost right - when taxes become a game, we've got problems. The problem is, they already are. They are a maze, for taxpayers - and particularly corporations -- to stumble through. And this maze in large part exists because liberal commentators and advocates refuse to recognize economic and tax realities. They deal in la-la-land thinking.

Who, for example, pays corporate profits taxes? To listen to Citizens for Tax Justice, you'd think the money came out of thin air, or just from the rich person's purse.

But just as property taxes aren't paid by rocks or trees, neither are corporate taxes paid by corporations. They come from the pockets of people. Who are they?

At one level, they are the shareholders - the investors. In the past, that could have been a code word for the rich. But not so today.

Today, nearly half of all American households own stock, according to the Securities Industry Association. In 1999, its surveys showed the country had 78.7 million shareowners representing 48.2 percent of all households.

But even that doesn't go far enough. Anyone with a pension plan, even if he owns not a share of stock or piece of a mutual fund, is nonetheless invested in the stock market. Pension funds today have assets of $4.8 trillion -- $3.6 trillion in defined benefit pensions and $1.2 trillion in 401(k)-style defined contribution plans, according to Pensions & Investments Jan. 21 report. And nearly three-fifths of the assets are in stock.

And who are the employees who benefit from these plans? They run the gamut from truck drivers to autoworkers to executives to public employees. Indeed, the top five defined benefit plans are public employee plans. And the top defined contribution plan is for federal retirees.

Finally, the investment community includes nonprofit charitable corporations. Be it the Freedom Forum for first amendment protection or the John D. and Catherine T. McArthur Foundation so fond of funding public TV and the environmental left, all have much of their funds invested in stocks.

The $200 billion annually raised by taxing corporations thus comes, in large part, at the expense of public servants, other ordinary workers, charities and education, not just the rich.

But corporate profits taxes also are born by others than shareholders. As James R. Hines of the University of Michigan wrote in a February 2001 National Bureau of Economic Research article, "Corporate taxation increases the cost of producing corporate output, thereby raising output prices, depressing demand, and shifting output from the corporate sector of the economy to the noncorporate sector."

In other words, consumers likely pick up some of the burden and workers definitely do.

But it's easier to bash nameless, faceless corporations than to say that pensioners, consumers and workers should do with less.

There is, though, also another aspect to corporate taxation that suggests that the cost is borne by other unintended victims. Because interest isn't taxed and dividends from profits are, loans become a preferable way to raise money than stock. That's why corporate America is $4.7 trillion in debt.

Liberals, who've raised concerns about the "crowding out" effect of federal borrowing to attack tax cuts, thus have this conundrum to deal with: If federal borrowing crowds out private investment funds, then corporate taxation by encourage corporate borrowing crowds out who? Some homebuyers with higher rates than otherwise would exist, perhaps?

So, the face of corporate taxation is now stocked with homeowners with higher mortgages, workers with lower wages and retirees with diminished retirement nest eggs and beneficiaries of charities and educational trusts.

And the sins are compounded - because outside of the corporation, the rich can garner their profits without taxation. Partnerships and so-called S Corporations provide many of the same legal benefits as corporations, but without a tax on their profits. Money is merely taxed at the individual level when it flows to the partners or S Corporation members as income.

This creates all sorts of room for the very kind of nefarious dealings that led to Enron's sorry demise. As Bruce Bartlett of the National Center for Policy Analysis astutely noted, Enron "was encouraged to become overleveraged by a corporate income tax that rewards debt and punishes equity." It was further encouraged to form hundreds of partnerships, with the help of Wall Street bankers, in foreign lands by tax loopholes. These loopholes, as Bartlett pointed out, were upheld in court.

But what's really makes Enron a scathing indictment of the tax system is that ordinary investors and institutional ones as well have already been bought into the need for corporations to engage in such shenanigans. The largest pension fund in the nation, the California Public Employee Retirement System (CalPERS) joined in one of the ventures, making more than $100 million ahead of the downfall. The John D. and Catherine T. MacArthur Foundation, according to the Chicago Tribune, lost millions in one.

How could they have become so foolish? In great part because the tax laws have made the accounting of corporations so abstruse and impenetrable. In such simple matters as depreciation, separate books for economic and tax accounting lead to different results.

And to top it all off, corporations are stuck with figuring there accounts a third time for the alternative minimum tax. So businesses today must count things three ways. The result is that the cost to corporations for complying with corporate tax demands - not the tax itself - equals nearly $100 billion, according to the Internal Revenue Service. What sense is there in that?

If pundits and advocates for liberal causes would simply recognize that corporations don't pay taxes but people do, and that the people they hit today aren't the rich, a better tax system would surely be found. Until then, every time they succeed in their rantings against corporations, it will be workers, retirees, homeowners and consumers who'll pay a double tax bill. And as for the rich, well, they can always get their money from untaxed partnerships.

"Reduce incomes for retirees," says USA Today editorial board contributor Ted C. Fishman. "Cut funding for charities," argues Newsweek's and the Washington Post's Allan Sloan. "Raise interest rates on home buyers," advocates Citizens for Tax Justice.

Have these folks gone crazy? Well, if they said those things, most people would think these so-called advocates of the average investor and taxpayer had lost their bearings.

So, to put your minds at ease, they didn't actually utter the above quotes. No, instead, they did what comes naturally to liberal commentators and advocacy groups - they bashed corporations for tax avoidance, which today more than ever may amount to the same thing.

Citizens for Tax Justice kicked off the annual slugfest last month, declaring that "The big corporate tax cut bill just passed by Congress and signed by President Bush will slash corporate income tax payments this year to their lowest level as a share of the economy since the early Reagan administration. This will be the second lowest level in the past 60 years."

Newsweek's Wall Street editor, Sloan, then weighed in with an April 9 column, "Corporate Tax-Avoidance Moves Are Hardly Patriotic."

He wasn't so much upset by new tax cuts but by corporations making use of old loopholes. Specifically, he targeted Stanley Works, the toolmaker, for setting up its headquarters in Bermuda to avoid corporate profits taxes, and Bank of America Corp. for an apparently legal double deduction.

"So what if our country is at war against terrorism and is spending billions extra for defense and homeland security? That's our problem. The tax dodgers' problem is raising profits to get their stock price higher. What could possibly be more important, since a good stock market is good for America, right?"

Fishman, in an April 10 USA Today piece, brought the patriotic theme home, In "Taxpayer patriotism sets sail," the contributing editor to Harper's Magazine and Worth attacked "the black arts of tax avoidance," led by corporations "building mazes of offshore corporations and partnerships," like those of Enron.

These, he intoned, set a bad example: "When it comes to paying taxes, inspiration isn't drawn from firefighters ... or from soldiers. ... The tax world's heroes are the companies that beat it. When firms reduce their taxes to nothing by all means possible, they are doing what they were designed to do: serving shareholders. Amorality is a virtue. Less aggressive firms are seen as failing investors. ... So why wouldn't Americans want the same things for themselves that they want in the companies they work for and invest in?"

His answer: "Corporations are not charged with realizing the shared duties of civic life; citizens are. When taxes become a game in which we all try to make the other guy pay, we will lose our honor system altogether. Or rather, we trade the grudging honor of paying for what we all share for another communal ethos: honor among thieves."

Fishman has got one thing almost right - when taxes become a game, we've got problems. The problem is, they already are. They are a maze, for taxpayers - and particularly corporations -- to stumble through. And this maze in large part exists because liberal commentators and advocates refuse to recognize economic and tax realities. They deal in la-la-land thinking.

Who, for example, pays corporate profits taxes? To listen to Citizens for Tax Justice, you'd think the money came out of thin air, or just from the rich person's purse.

But just as property taxes aren't paid by rocks or trees, neither are corporate taxes paid by corporations. They come from the pockets of people. Who are they?

At one level, they are the shareholders - the investors. In the past, that could have been a code word for the rich. But not so today.

Today, nearly half of all American households own stock, according to the Securities Industry Association. In 1999, its surveys showed the country had 78.7 million shareowners representing 48.2 percent of all households.

But even that doesn't go far enough. Anyone with a pension plan, even if he owns not a share of stock or piece of a mutual fund, is nonetheless invested in the stock market. Pension funds today have assets of $4.8 trillion -- $3.6 trillion in defined benefit pensions and $1.2 trillion in 401(k)-style defined contribution plans, according to Pensions & Investments Jan. 21 report. And nearly three-fifths of the assets are in stock.

And who are the employees who benefit from these plans? They run the gamut from truck drivers to autoworkers to executives to public employees. Indeed, the top five defined benefit plans are public employee plans. And the top defined contribution plan is for federal retirees.

Finally, the investment community includes nonprofit charitable corporations. Be it the Freedom Forum for first amendment protection or the John D. and Catherine T. McArthur Foundation so fond of funding public TV and the environmental left, all have much of their funds invested in stocks.

The $200 billion annually raised by taxing corporations thus comes, in large part, at the expense of public servants, other ordinary workers, charities and education, not just the rich.

But corporate profits taxes also are born by others than shareholders. As James R. Hines of the University of Michigan wrote in a February 2001 National Bureau of Economic Research article, "Corporate taxation increases the cost of producing corporate output, thereby raising output prices, depressing demand, and shifting output from the corporate sector of the economy to the noncorporate sector."

In other words, consumers likely pick up some of the burden and workers definitely do.

But it's easier to bash nameless, faceless corporations than to say that pensioners, consumers and workers should do with less.

There is, though, also another aspect to corporate taxation that suggests that the cost is borne by other unintended victims. Because interest isn't taxed and dividends from profits are, loans become a preferable way to raise money than stock. That's why corporate America is $4.7 trillion in debt.

Liberals, who've raised concerns about the "crowding out" effect of federal borrowing to attack tax cuts, thus have this conundrum to deal with: If federal borrowing crowds out private investment funds, then corporate taxation by encourage corporate borrowing crowds out who? Some homebuyers with higher rates than otherwise would exist, perhaps?

So, the face of corporate taxation is now stocked with homeowners with higher mortgages, workers with lower wages and retirees with diminished retirement nest eggs and beneficiaries of charities and educational trusts.

And the sins are compounded - because outside of the corporation, the rich can garner their profits without taxation. Partnerships and so-called S Corporations provide many of the same legal benefits as corporations, but without a tax on their profits. Money is merely taxed at the individual level when it flows to the partners or S Corporation members as income.

This creates all sorts of room for the very kind of nefarious dealings that led to Enron's sorry demise. As Bruce Bartlett of the National Center for Policy Analysis astutely noted, Enron "was encouraged to become overleveraged by a corporate income tax that rewards debt and punishes equity." It was further encouraged to form hundreds of partnerships, with the help of Wall Street bankers, in foreign lands by tax loopholes. These loopholes, as Bartlett pointed out, were upheld in court.

But what's really makes Enron a scathing indictment of the tax system is that ordinary investors and institutional ones as well have already been bought into the need for corporations to engage in such shenanigans. The largest pension fund in the nation, the California Public Employee Retirement System (CalPERS) joined in one of the ventures, making more than $100 million ahead of the downfall. The John D. and Catherine T. MacArthur Foundation, according to the Chicago Tribune, lost millions in one.

How could they have become so foolish? In great part because the tax laws have made the accounting of corporations so abstruse and impenetrable. In such simple matters as depreciation, separate books for economic and tax accounting lead to different results.

And to top it all off, corporations are stuck with figuring there accounts a third time for the alternative minimum tax. So businesses today must count things three ways. The result is that the cost to corporations for complying with corporate tax demands - not the tax itself - equals nearly $100 billion, according to the Internal Revenue Service. What sense is there in that?

If pundits and advocates for liberal causes would simply recognize that corporations don't pay taxes but people do, and that the people they hit today aren't the rich, a better tax system would surely be found. Until then, every time they succeed in their rantings against corporations, it will be workers, retirees, homeowners and consumers who'll pay a double tax bill. And as for the rich, well, they can always get their money from untaxed partnerships.
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