28% of US corporations aren’t paying tax

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The Washington Post has reported that:

About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005, according to a new report scheduled to be made public today from the U.S. Government Accountability Office.

In 2005, after collectively making $2.5 trillion in sales, corporations gave a variety of reasons on their tax returns to account for the absence of taxable revenue. The most frequently listed included the cost of producing their goods, salary expenses and interest payments on their debt, the report said.

The GAO did not analyze whether the firms had profits that should have been taxed.

Now, let's deal with the counter arguments straight away: I know (but not all American politicians seem to know) that under US law S corporations and many other entities able to use 'tick the box' tax rules can transfer their tax liabilities to their members as if they were limited liability partnerships and therefore should not be paying tax: someone else is paying tax instead. I'm pretty sure that accounts for a reasonable proportion of the non-payment, and I don't want to exaggerate a case.

This might also explain why it's reported that:

A greater proportion of large corporations pay taxes, according to the GAO. In 2005, about 28 percent of large corporations paid no taxes. Of the 1.3 million corporations included in the study, 998 were categorized as "large."

I gather that a large corporation means that they had at least $250 million in assets or $50 million in receipts.

This ratio is remarkably similar to the ratio found in the UK last year.

That does not mean that there isn't an issue: far from it, there is. Sen. Dorgan and Sen. Carl M. Levin requested the report out of concern that some corporations were using "transfer pricing" to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates. The GAO said data on transfer pricing were scarce.

Of course it is: the whole model of corporate accounting and tax reporting is designed to make it as hard as possible to identify the issue. I use the word designed advisedly: I do not think this pure chance.

Country by country reporting would largely eliminate this abuse. It exposes international intra-group trading. Nothing else does this as yet.