Wednesday, August 13, 2008

Study Tallies Corporations Not Paying Income Tax -

While it might be more of an accounting piece, it is still sort of interesting for corporate finance classes. And definitely draws into question using stated (as opposed to effective) tax rates for computing cost of capital etc.

Study Tallies Corporations Not Paying Income Tax - "Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released Tuesday by the Government Accountability Office, the investigative arm of Congress."

In the article (which is not the best), transfer prices are brought up. And since that is always a topic in class, the following is worth noting:
"...the G.A.O. said that it did not have enough data to address the role of what some policy experts say is a crucial factor in profits sent overseas.

That factor, known as transfer pricing, involves corporations’ charging their overseas subsidiaries lower prices for goods and services, a common move that lowers a corporation’s tax bill. A number of corporations are in transfer-pricing disputes with the Internal Revenue Service."

While this is interesting, I would much rather see how much they paid. For instance the article said that larger firms were more apt to pay taxes, but does not say if that is 1% or 34% etc. But in spite of the problems it is still worth reading and shows that the money paid to accountants and tax lawyers is not for nothing.


Anonymous said...

First, as an economist, you must understand that corporations do not pay taxes. (People pay taxes) But second, from an accounting standpoint, what is missing is that under the relatively new S-corp rules, most corporations pay their taxes under the personal income tax code and so are "missing" from the corporate rolls. Notice how the article says it is the small corps which are missing from the rolls. Those are mostly the S-corps.

David Friedman said...

It's a striking story, but it doesn't seem to be true. Take a look at the Reuters account of the same report, published the same day:

According to that, the count is of corporations that, in at least one year in the seven year period, paid no taxes. There's nothing surprising about a corporation that, one year out of seven, makes no profit.

What is surprising, assuming the Reuters version is correct, is the level of journalistic incompetence shown by the New York Times, converting one year out of seven into seven years out of seven.

Being a professor myself, I would have thought a finance professor would be a little more careful about checking his facts before reporting them.

FinanceProfessor said...

THe actual report is here.

It does seem that the NY Times was correct. I stand by the story. It does appear that the firms are liekly to not paying taxes in any given year, not just year one year in seven as was suggested.