David Cay Johnston

By David Cay Johnston
The views expressed are his own.

Pay close attention to the Occupy Wall Street demonstrations in New York and around the United States, especially if the protests endure through the cold months into the election year spring or if the New York police are ordered to violently end the demonstrations, which would ensure they spread.

The protests show signs of sparking a major change in U.S. politics by creating common ground among people with wildly divergent views. The key to their significance will be whether they foster a wholesale change in political leadership in 2013 or whether Americans return a vast majority of incumbents in both parties at all levels of government.

Occupy Wall Street differs fundamentally from the many demonstrations I have covered over more than four decades. Instead of people with similar specific interests — anti-war, anti-rape, Tea Partiers — these demonstrators come with widely varying views, experiences and backgrounds, yet unite around a common theme: bankers are ripping off America.

Two secondary themes also emerge in talking to some of the hundreds of people occupying Zuccotti Park. One is that the super rich own the politicians. The other is that the news media, almost across the board, view events through the eyes of the rich.

The protests have grown from a few hundred people to the thousands who marched on Wednesday evening.

WASHINGTON BLAMED
Even Ben Bernanke, the Federal Reserve chairman, sympathizes with the protesters. He told the Joint Economic Committee of Congress on Wednesday:

“Very generally, I think people are quite unhappy with the state of the economy and what’s happening. They blame, with some justification, the problems in the financial sector for getting us into this mess, and they’re dissatisfied with the policy response here in Washington. And at some level, I can’t blame them. Certainly 9 percent unemployment and very slow growth is not a good situation.”

In a television interview Warren Buffett sided with them. While many of the demonstrators seemed ill-informed, he said, the “feeling is real and there is enough basis in that feeling that we want to get rid of that basis,” which he described as unfair taxes and lack of jobs.

Listen to the people packing Zuccotti Park, a privately owned urban space just off Wall Street, and you will hear common themes from libertarians and liberals, truck drivers and college professors, atheists and believers.

Some are articulate, others inchoate. But there is absolute agreement that the super rich, especially the financiers, are sophisticated thieves who steal not with guns, but something called derivatives.

Dan Halloran, a New York City councilman from Queens with an affinity for libertarians like Republican U.S. Congressman Ron Paul, waded into the crowd and kept people interested in his views on the economy’s failings and the need for markets.

“From what I saw on TV I would have thought that everyone here would be a communist, under 30, never held a job,” he said, describing that media image as cartoonish. He said people with whom he had spoken, including those with whom he disagreed fundamentally, were both eager to work and afraid, not knowing what happened exactly, but insistent that they needed work and that their elected leaders seemed not to care.

NO ‘FAIR SHAKE’
Brendan Burke, a truck driver and punk rock musician who studied philosophy in college, said since the protests began almost three weeks ago, “I have heard a thousand different things people are concerned about — inadequate teacher pay, no jobs, the rich not paying their fair share of taxes and all of it was about how we working people are not getting a fair shake.”

Burke said he expected the protests to gather strength because “this oppressiveness has been going on for years; its quiet, the way the bankers constructed this mess — and nothing is being done to them.”

When I went down there on Tuesday, some asked me why no bankers had been indicted. Excellent question with no answer unless you believe the financier class exercises control over the government, enabling financial crimes through incomprehensible rules.

Each person I asked, including some in suits who came by for a gander, said they expected the mayor eventually to order the park cleared, possibly on the pretext of public sanitation. Never mind that the Constitution safeguards the right to assemble peaceably and to petition the government for a redress of grievances without a time limit.

New York’s billionaire mayor found time and money to have police barricade the Wall Street bull, that bronze symbol of faith in growing stock prices. But Michael Bloomberg has spent not even a dollar on portable restrooms to help citizens exercise their constitutional rights while maintaining sanitary conditions in his fair city.

Aristotle taught, “Democracy is when the indigent, and not the men of property, are the rulers.” That ancient insight may be unknown to many of the demonstrators, but the concept imbues Occupy Wall Street, which has the potential to change America from what Aristotle would describe as an oligarchy back into a representative democracy.

PHOTO: A demonstrator sits near a make-shift tent during the Occupy Wall Street protest outside the Federal Reserve Bank in San Francisco, California October 5, 2011. REUTERS/Stephen Lam

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

From the way Washington politicians in both parties tell it, you may well think that multinational companies favor low-tax jurisdictions when investing overseas. They don’t.

The multinationals prefer investing in high-tax jurisdictions because it so happens that is where they can earn the highest returns.

Multinational companies then reduce or eliminate those seemingly high taxes by using simple, widely used devices to take profits in low-tax and no-tax jurisdictions.

Such practices create “stateless income,” in the words of Edward Kleinbard, whose new scholarship on corporate taxation deserves our attention.

As defined by Kleinbard, stateless income means profits earned in a country other than where the firm is headquartered and subject to tax only in a third country which imposes little or no tax.

Kleinbard shows why stateless income is the most serious threat to the corporate tax base even as Washington politicians blather on about less important corporate tax issues that their remarks show they do not understand.

Kleinbard is a master designer of tax avoidance devices for multinational corporations. During three decades as a Cleary Gottlieb Steen & Hamilton tax partner, Kleinbard also wrote scholarly critiques of tax policy, simultaneously exploiting and exposing flaws in tax regimes.

In 2007 Kleinbard became chief of staff for the Congressional Joint Committee on Taxation. Since 2009 he has been a professor at the University of Southern California’s Gould School of Law.

HARD FACTS

In three lengthy new essays Kleinbard tries to open minds to hard facts and logic to steer the corporate tax debate back to policies based on reality — economic, accounting and legal.

To see the essays, click here.

In a global economy in which capital markets are efficient and capital flows across borders at the push of a button, after-tax returns on investment will gravitate toward a mean. Kleinbard uses a global 5 percent after-tax return to model the issues.

Because different countries impose different tax rates this means that pre-tax returns must vary, with companies having to find ways to earn more in high-tax jurisdictions than in low-tax jurisdictions.

Kleinbard cites a hypothetical example with three countries, two of them make-believe, to show the tax algebra.

The United States imposes a 35 percent corporate income tax, Sylvania a 25 percent tax and Freedonia 10 percent. The algebra says pre-tax returns should be 7.7 percent in the U.S., 6.67 percent in Sylvania and 5.56 percent in Freedonia.

A U.S. firm will invest in high-tax Sylvania rather than low-tax Freedonia, Kleinbard wrote in a lengthy essay for Tax Notes. Then the company will game the rules of the three countries to easily report its profits for tax purposes in low-tax Freedonia.

The result is the Sylvania investment earns 6 percent after tax. That is a fifth more than the 5 percent worldwide after-tax return in Kleinbard’s model.

Juicing after-tax profits using the simple, widely used devices to take profits in real places like the fictional Freedonia distorts investment decisions and erodes the U.S. corporate tax base. Kleinbard suggests it also inflates U.S. stock prices.

“TAX RENTS”

That multinationals can earn a fifth higher profit this way exemplifies what Kleinbard calls “tax rents,” meaning benefits derived not from value-adding economic activity, but from exploiting the rules of different national tax systems.

Corporations that operate only in the U.S. should worry about rules that encourage multinational corporations to create stateless income because the result tilts the playing field against purely domestic companies, many of which are family-owned.

“Stateless income tax planning offers multinational firms, but not wholly domestic ones, the opportunity” to earn higher after-tax profits not because they are more efficient, but because of “their unique ability to move pre-tax income across national borders.”

If tax rules let a competitor game the tax system to earn $1.20 of after-tax profit for every $1 a purely domestic company can earn, then it is just a matter of time before the disfavored business deteriorates while the competition flourishes. Thus does government policy, not market competition, subtly determine winners and losers.

Ignoring the reality of tax erodes the tax base, distorts economic decisions and through shortsighted policy enriches the few at the expense of the many.

That corporations prefer investing overseas in high tax countries may seem to defy common sense. But much of tax is counterintuitive and requires careful study of a kind that was once much more common on Capitol Hill. Sadly, as partisanship has grown along with reliance on campaign donors, serious thinking about taxes has been supplanted by ideological marketing that has more in common with advertising than serious policy debates.

Since tax is the largest economic activity in the world, it is crucial that we base our policies on facts, not fantasies, if civilization is to endure. Get tax wrong and the damage diminishes markets, distorts investments, destroys private wealth and endangers social stability.

This column will explain more of Kleinbard’s insights in the weeks ahead, along with those of others whose rigorous thinking and research reveal that much of the Capitol Hill tax debate displays magical thinking.

By David Cay Johnston
The writer is a Reuters columnist. The opinions expressed are his own.

Each year New York State lets real estate investors evade at least $200 million of taxes. In peak years the figure likely rises to $700 million, if known tax cheating in another state is any indication. Some of the investors who cheat New York State also cheat New York City out of at least $40 million annually.

Back in the 1990s Jerry Curnutt figured out how to finger such cheats when he was the top partnership specialist at the Internal Revenue Service. Curnutt’s computer sifted through tax returns until he learned how to separate thieves from honest taxpayers. The tax-evasion estimates of $200 million and $40 million are his.

Six New York state tax auditors took classes Curnutt taught in June 2000 and gave stellar evaluations. California’s top tax auditor praised Curnutt’s course as “effective, relevant and most importantly, appreciated and understood by our auditors.”

Why has nothing been done for more than 11 years to make the cheats in New York pay what the law requires?

New York state and city are strapped for cash, slashing services for the poor, disabled and elderly. With penalties of up to 50 percent plus interest at penalty rates, the state is easily due more than $5 billion from years still open to collection, I calculate.

Every state has similar issues, but New York matters most as the epicenter of highly leveraged real estate investment pools.

Curnutt found that real estate investment partnerships with depreciated properties often misreport gains when they sell. That such cheating is widespread screams about tax law enforcement looking the other way when those at the top steal. In contrast, New York State has a well-deserved reputation for going after people whose mistakes cost the state as little as three dollars.

GO AWAY, THEY SAY

Yet in letter after letter since 2001, New York state tax officials told Curnutt to go away, smugly insisting there were no untaxed millions.

As head of audits for New York State, Thomas Heinz wrote Curnutt in 2003 that the state was “not interested in pursuing you or any other consultant on the matter” of systematic cheating by real estate partnership investors. Months later Heinz wrote a second letter that made it clear he had not understood what Curnutt was proposing, while reiterating that there were no untaxed millions to be found.

A year ago Curnutt again was told to go away because there was no money going untaxed.

And yet in Pennsylvania, Curnutt’s research “resulted in the taxation of over $700 million in unreported income,” the Pennsylvania Revenue Department wrote in a letter to tax administrators across the country in reference to a single instance.

“Without his assistance, our staff would have spent numerous hours getting to the crux of the issues, in that especially complex case,” Pennsylvania tax authorities said.

Pennsylvania has relied on Curnutt since 2002, calculating that every dollar spent on his research and subsequent audits was worth $10 of tax.

So why are sightless sheriffs ignoring massive cheating by the most affluent among us?

The likely reason became clear nearly a decade ago when one Kentucky tax official told Curnutt that the governor’s office did not want his services because it would uncover tax cheating by influential citizens, meaning campaign donors.

It is time for New York’s three top state officials, all Democrats with higher ambitions, to do their duty, especially since the thieves are virtually certain to include some of their campaign contributors.

LAWMEN AND THEIR DUTY

Governor Andrew Cuomo, who harbors ambitions to be president, made his name as a state attorney general who appeared to get tough with Wall Street. Lieutenant Governor Bob Duffy rose from Rochester street cop to chief and would love to be governor. So would Attorney General Eric T. Schneiderman, elected in 2010 on a promise to be tough on white-collar crime.

Mayor Michael Bloomberg, an independent, has a similar duty to go after tax cheats even if these should turn out to include some of his friends.

New York law gives authorities leverage aplenty. The mere threat of public exposure through civil lawsuits would prompt many to write checks. For repeat offenders, the threat of indictment for tax evasion would produce checks even faster. Faced with the prospect of civil or criminal charges, many in positions of public trust would be ruined if their names got out.

The general partners — those in charge in the partnerships Curnutt investigated — took calculated steps to cheat and the most serious offenders should face indictment and, upon conviction, years of prison time. But many limited partners may have assumed their K-1 tax statements were reliable. Innocent victims owe taxes and interest, but not penalties. Those with multiple untaxed gains are not innocents.

As lawmen Cuomo, Duffy and Schneiderman all understand leverage. They have enough to lift billions into the state treasury where it belongs just by indicating in letters that failure to pay will result in disclosure of names. Will they?

Until Cuomo, Duffy, Schneiderman and Bloomberg enforce the law, their official inaction lends credence to billionaire Leona Helmsley’s remark, quoted by her housekeeper, that “we don’t pay taxes; only the little people pay taxes.”

This column will keep you posted on whether these officials act or not.

By David Cay Johnston
The views expressed are his own.

President Barack Obama this week started pitching his plan to cut U. S. taxes for everyone in 2012 and then in 2013 raise income tax rates for high earners, primarily those making more than $1 million, many of whom bear a lighter burden than a cop married to a nurse.

Two responses are certain.

There will be claims that economic ruin will follow once taxes go up. Never mind the proposed 2012 tax cuts are for virtually everyone. Never mind that the modest rate hikes would apply only to those who make more than 97 percent of their fellow Americans with most of the burden on those making more than $1 million. Never mind IRS data showing that tens of thousands of those whose increased taxes would increase their income tax rate by just 1.2 percentage points make more in a year than the median family earns in a lifetime.

Obama has also set a clever trap for anti-tax Republicans. Obama’s American Jobs Act would lower Social Security taxes for all workers and for all businesses in 2012. Republicans who vote against the bill would be voting against a tax cut. They would also be voting against a huge business tax break, letting business immediately write off all capital investments made in 2012.

The other, more pernicious attack will be on the best funded, most effective and most efficient government program around: Social Security.

The latest assault on Social Security comes from Governor Rick Perry of Texas, a Republican presidential hopeful who insists that social insurance for widows, orphans, the disabled and the old is a Ponzi scheme.

If Social Security is a Ponzi scheme then so are public education, businesses and the state government that has for decades employed Rick Perry.

ACCOLADE OR EPITHET
The education of the children born to today’s kindergarten students must come from future tax revenues. The profits Wal-Mart makes in 2091 depend on people not yet born making purchases. And if Perry is elected president, his salary and presidential pension will depend on new money coming in.

Every enterprise depends on future income, which is where any similarity between legitimate activities and Ponzi schemes ends, though Perry seems ignorant of this.

Perry boasts that he was an awful student. Instead of being dismissed as a know-nothing, however, he is a serious contender for the most important job in the world, in part because many Americans have been persuaded that the word “elite” is not an accolade but an epithet.

Egging on Perry are people whose elite education suggests they should know better, like Washington Post columnist Charles Krauthammer, who has an M.D. and a Pulitzer prize. One need not be elite, which means “the best,” to know that Ponzi schemes are criminal enterprises that depend on secrecy to defraud.

In contrast, Social Security is an open book. It publishes exhaustive financial reports, all of which have proven reliable. Social Security’s overhead, at less than one percent, is a much smaller share of its budget than any large corporation or that multi-billion dollar enterprise known as the State of Texas. And Social Security has collected more than $2 trillion in advance to help pay future benefits through 2037. That surplus makes it an anti-Ponzi scheme.

Social Security’s projected $5.3 trillion shortfall sounds huge, but it is spread over 75 years, making its impact insignificant. This minor problem would shrivel if we just went back to the levy under President Ronald Reagan, when 90 percent of wages and salaries were subject to the Social Security tax instead of the 83 percent today.
The shortfall would vanish if we reversed our policies that discourage higher education, export jobs, drive down wages and savage our manufacturing, research and development prowess.

CAT FOOD FOR DINNER
Most Americans are not old enough to recall when old ladies bought cat food on sale, not for a pet but for dinner. A half century ago more than a third of older Americans lived in poverty. Today fewer than 10 percent do because of Social Security.

More than a third of older Americans rely on Social Security for 90 percent of their income. The average benefit is just $14,124 per year, but many older Americans get only half that much, which Perry and Krauthammer tell us is more than we can afford.

Gentlemen, will that be Fancy Feast or Meow Mix for your fellow Americans who have not fared as well as you have fared?

Now let’s put the Obama plan, which has no chance of becoming law in the current Congress, in perspective. He would raise taxes on 534,000 of an estimated 166 million taxpayers in 2013 by an average of $39,182 each, the Tax Policy Center calculated. Their average income was $3 million in 2009, which is more than twice what the median income taxpayer earns in a lifetime of work.

Together these top earners made more money in 2009 than the 56.5 million taxpayers whose cash income was less than $25,000 and on average just $12,366.

To assert that we must not raise taxes at the top, but we must cut Social Security is to say this: America’s rich do not have enough and we must take from those with less to give the rich more.

Can we do better? Of course, but we won’t until we make it standard for politicians to develop their minds, and to understand taxes and public finance, enough so that we can call them elite.
(Editing by Howard Goller)

By David Cay Johnston
The views expressed are his own.

It’s time to prick the popular image of ballooning executive pay with some sharp new facts.

As a group, corporate officers — executives with broad authority to act on the company’s behalf, not just follow orders from the CEO or some other boss — are making less, not more, my analysis of newly available tax data shows.

This is in sharp contrast with the thoroughly documented excesses at the very top revealed through analysis of disclosures to shareholders. The new tax data includes CEOs, but the few score of wildly overpaid ones at the biggest companies become statistically insignificant within the universe of nearly a million corporate officers covered in the new tax data.

Many CEOs get paid far beyond what economic theory says is necessary to motivate them. Worse, a fair number enjoyed soaring pay while shareholders saw their wealth dwindle, as with John Snow when he ran the CSX Corp railroad company. When Snow left to become Treasury secretary his pay had grown 69 percent, while the price of CSX shares fell as much as 64 percent, just one of many disconnects between CEO pay and performance.

But among the nearly one million corporate officers in the United States, this new data, never available before, show that the overall story is one of shrinking pay.

TOP-LEVEL SQUEEZE
One implication of this is that executives at the very top are squeezing those just below them. This fits with anecdotal information many mid-level executives have provided me over the years. But it may also mean that many companies are not properly filling out their tax returns, neglecting to fill in Schedule E as required, understating officer pay, especially at nonpublic companies.

Corporate officers earned less total pay in 2008 than they did a decade earlier in 1998, even though there were more company officers at firms with more than $500,000 of revenue, the threshold for reporting by name to the IRS. In all but two years since 1998, total pay was higher than in 2008.

Average pay looks to be significantly smaller than way back in 1994.

Measured in 2008 dollars, the 990,077 corporate officers whose compensation was reported on tax returns made $466.8 billion in 2008, down slightly from $471.4 billion in 1998.

In 2008 their average compensation was $471,500, down about 13.5 percent from an estimated $545,100 in 1994.

These figures, which I distilled from traditional IRS statistical reports plus a valuable new IRS data set, run counter to the image of the bloated corporate pay packages that have been a staple of spring news reports for two decades. I feel a special duty to analyze the new data because I wrote many of the front-page New York Times reports that directors of some of the largest companies told me later made them realize that they were paying their CEOs far more than they thought. This new data provide a much broader picture not only of corporate pay, but also of profitability, than available before.

BORING TITLE, BUT…
The new data come from a document entitled “2008 Estimated Data Line Counts / Corporate Tax Returns.”

That boring title belies a wealth of information that stock analysts, tax lawyers, accountants, government revenue estimators and policy wonks of all kinds can extract from its 246 pages.

The IRS has long published similar reports on individual income tax returns. The new corporate report is one of several I have for which I have agitated over the years to provide a more rounded and thorough source of information about incomes, assets and tax burdens. (Partnerships next, please!)

The report consists of the various Form 1120s and their schedules, showing how many times each line was filled out. What makes the report valuable is a second set of the same pages showing the total amount of money entered on each line, pages fittingly tinted green.

Existing IRS corporate tax reports have for years shown us that fewer than 2,600 megafirms own 81 percent of all U.S. corporate assets. Another 21,000 firms control most of the rest, leaving just 5.6 percent of corporate assets that are divvied up among the more than 5.8 million remaining corporations.

The new data report, combined with the old, can be mined for trend lines about assets, liabilities, compensation, fringe benefits, profitability and other information needed to make smart investments and devise public policies that comport with reality, not rhetoric.

CALCULATED CLUES
The figures on 2008 average corporate officer pay were calculated from the new report. To estimate average corporate officer pay in 1994 I calculated that the number of officers grew in tandem with the number of corporations, a rough proxy for sure. I tried some other proxies and the results were in the same range.

The 2008 data show that while almost three million corporate officers show up on company tax returns, only 990,077 Social Security numbers do and of those only 838,551 show up as being paid. That may suggest some owners took no pay in the Great Recession year of 2008, but it also hints at how many officers serve multiple corporations.

The officer pay data show huge variations. Just 70 officers of 1,660 Real Estate Investment Trusts averaged $5.2 million in 2008, while 832 officers of 7,670 property and casualty insurers averaged $3.8 million. At the other end, more than 2.1 million officers of S Corporations averaged just $107,403, though many of them must be officers of multiple corporations.

The new data also show that in 2007, the last peak economic year, the total pay of corporate officers was almost one percent smaller than in 2000, the previous peak year. Compare this with the stock market, whose 2007 peak adjusted for inflation was about 17 percent lower than in 2000.

Since 1994, business receipts have grown about 50 percent faster than profits, tax data show. Since corporate officers are supposed to run companies efficiently, the narrowing margin on sales is an indicator of poorer performance and thus may partially explain why overall their pay is smaller than in the 1990s, a fact nobody knew until just now.

Many CEOs continue to enjoy pay out of sync with performance, but the more important story appears to lie in the diminishing compensation of the vast majority of corporate officers, the people you never hear about as a group.  (Editing by Howard Goller)

By David Cay Johnston
The views expressed are his own.

Every day we hear politicians and pundits say that government spending cannot lift the economy out of the worst slump since the 1930s, which is as sensible as saying that 2-1=3 or that water and flour make steak.

Those who said after President Barack Obama’s speech last week to Congress that government does not create wealth, does not create jobs and cannot stimulate the economy spoke nonsense. So do those who say that only private business creates wealth, as if any revenue going to taxes destroys wealth.

Adam Smith, who figured out market capitalism in his 1776 book “The Wealth of Nations,” could set them straight. We have plenty of equally competent economists who understand these issues today. They just do not get the attention that the news media lavish on high-profile politicians and pundits who speak with absolute certainty on matters about which their words show they know nothing.

So why are politicians and commentators who speak economic nonsense treated as sages? And why do so many journalists uncritically repeat their nonsense?

Sadly, the answer is that too few people in public life understand economics, numbers or algebra. Too few people learned, or remember, the crucial concept underlying matters of economics and finance known as accounting identities.

ACCOUNTING IDENTITIES
Accounting identities are statements that must be true no matter how you arrange the components. Thus 2+1=3 just as 3-1=2. Likewise, net worth equals assets minus liabilities just as assets equal liabilities plus net worth and profits equal revenue minus costs. But water plus flour does not equal steak.

In economics, Gross Domestic Product equals consumer spending plus government spending plus investment plus the net of exports and imports. Or in its simplest form: Spending = Output = Income.

Economics is like a circle, as Smith figured out 235 years ago. More spending by government creates jobs, whether at war plants making smart bombs, dredging ports so cargo moves efficiently or stimulating the gray matter between young ears to create productive adults. Bombs ultimately destroy value, while ports and education add value.

Now, refreshed on the bedrock economics of accounting identities, consider these statements by three prominent Republican lawmakers:

“We need to cut spending now in order to create jobs in America” — House Speaker John Boehner on the floor of the House of Representatives in July 2010. “If government spending would stimulate the economy, we’d be in the middle of a boom” — Senator Mitch McConnell in March 2011. “Government doesn’t create jobs, you do” — Representative Nan Hayworth, M.D., speaking in January to business leaders in her New York district.

None of the comments makes sense. The first violates the accounting identity that spending equals income. The second assumes that the stimulus was big enough to make up for the fall in private sector jobs, when it was less than half what accounting identity algebra showed was needed. The third is just plain nonsense.

JOBS ARE KEY
It is certainly true that jobs are key. People with jobs are taxpayers, while those without tend to become taxeaters. More wages mean more spending, which is income to others.

As John Maynard Keynes observed in 1932: “There is no possibility of balancing the budget except by increasing the national income, which is the same thing as increasing employment.”

None of this means that President Obama’s jobs package, which has no hope of becoming law, is the optimal approach. It relies, however, on sound principles.

On the other hand, creating jobs that cost more than they add in value destroys wealth. That is why a defense plant for which Senator McConnell wants to get a federal loan guarantee of $1.7 million per job makes no sense economically.

We also inhibit future wealth when we fire teachers, let roads fall apart so that truck traffic slows and repair bills rise, and ignore weakened dams whose collapse would destroy property and lives. Cutting research funds just sends researchers to China and India, along with future fortunes.

Investing in education, research and infrastructure all add to economic inputs and, in turn, increase economic outputs.

In general the market does a better job of allocating capital for investment than government does. But when the market fails, as with the unregulated insurance and bad loans that destroyed so much value in the last decade, then the only way to stop the vicious cycle of decline is for government to temporarily make up the difference through more spending. Saying otherwise is the economic equivalent of arguing that water and flour make steak.

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

Since at least July 1, 1943, the day income tax withholding from paychecks began to finance war and tamp down demand for consumer goods, American politicians have promised a simpler tax system.

But while politicians talked on for seven decades, the code grew ever more complex with favors for this group or that, favors that mostly benefited the rich.

One country actually has created a very simple income tax. That would be China, its income tax filing rules modeled on those of the U.S. Congress circa 1913-1942.

Until Sept. 1 Chinese workers who earned less than 2,000 yuan per month (about US$313) paid no income taxes. That is when the threshold for paying taxes was increased to 3,500 yuan (about US$548). The change removed 60 million Chinese workers from the income tax rolls and cut taxes for another 24 million.

“Under the new amendment, about 7.7 percent of wage earners will have to pay tax, down from the current 28 percent,” Wang Jianfan, deputy director of the tax policy department at the Ministry of Finance, said in announcing the changes, China Daily reported in June.

In Washington the Republican leadership has been decrying the fact that half of American households pay no income tax. Partly that is due to millions being too poor to owe income taxes, though they pay payroll, sales and other taxes. The other big factor is the $1,000 per child tax credit, sponsored by Republicans, which removed millions of middle class families from the income tax rolls.

While Americans spend billions on income tax advice and paperwork, in China there is no arduous tax preparation.

LESS THAN 1 PERCENT
Only those Chinese who make more than 120,000 yuan annually (US$18,800) even file a tax form, and that’s a small fraction of one percent of the population. In the United States married American couples must file a tax return once their income reaches $18,700, while the threshold to be in the top one percent of workers is $200,000, Social Security Administration data show.

It takes a couple of minutes to complete the Chinese form according to Lawrence Lipsher, an American accountant who has long worked in China.

Contrast this with the U.S. system with its complex rules. The vast majority of the working poor pay someone to fill out their tax returns so they can qualify for the Earned Income Tax Credit, a negative income tax that President Ronald Reagan called “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”

American taxpayers took $6.4 billion in tax deductions just for the costs of preparing their income tax in 2009, an economic drag not suffered in China.

The United States once had a very simple tax return, but that was almost a century ago when the modern income tax began. The 1913 income tax form consisted of three pages plus one page of instructions. Only those at the top paid income taxes, filling out that simple form, just as in China today.

The Chinese are in the early stages of developing an income tax. They have only the simplest enforcement mechanism. In America it is commonplace to attach explanatory statements to tax returns because people’s income situation does not always fit neatly onto a Form 1040 or all the schedules that Congress has ordered up as it has handed out tax favors galore.

FAVORS FOR THE RICH
These tax favors tend to be skewed up the income ladder. Less than half of homeowners, for example, make enough to get any savings from deducting mortgage interest. The share of people benefiting from tax breaks for retirement plans and healthcare rises with income, an upside subsidy system for the affluent. At the nonprofit, nonpartisan Tax Policy Center, Eric Toder, Len Burman, and Chris Geissler added up all of these tax breaks for 2007. The total came to $950 billion.

To give that number some perspective, for every dollar of individual income tax revenue the federal government collected that year Congress gave tax breaks worth 80 cents. While those tax breaks benefit some, they mean higher taxes for those who do not qualify and a lot of time doing paperwork.

If we dumped all the tax favors, all else being equal, we could make one of three choices. We could cut tax rates across the board. We could bring in enough money to make the perennial federal budget deficits the kind of minor concern they were before the Reagan era. Or we could exempt at least 72 percent of American workers from paying income tax, as China did until this month.

Imagine the talk in Washington if, as in China now, 92.3 percent of American workers were exempt from income tax. Imagine also how much simpler and pleasant life would be if, as with China today and America long ago, we had an income tax so simple you need not file a return unless you were highly paid and, even then, could file a return in a couple of minutes.

Then again, the Chinese are modeling their income tax system on ours. So as some in China speak of the possibility of greater democracy at some future time, one wonders whether their leaders might then model themselves after American politicians, who hand out ever more tax favors and then decry complexity and the tax rates required to make up for those favors.

Lipsher said his bet is that within a century “China will create a system as hellacious as America’s.”  (Editing by Howard Goller)

By David Cay Johnston
The opinions expressed are his own.

The Obama administration’s support for killing off the U.S. Statistical Abstract underscores what’s wrong with Washington’s approach to cutting the budget. This nearly thousand-page compendium of official data is in its 130th and evidently last edition since 1878. It is published online and in print.

Taxpayers will save the $2.9 million it costs in a year to compile the data from a multitude of government, academic, nonprofit and industry websites.

But how much time will be wasted hunting for data without this ready reference? How much will state and local taxpayers pay for the extra time reference desk librarians need to answer questions? How many questions will go unanswered? And what of the Statistical Abstract’s value in quickly and efficiently pointing to other sources for a deeper look that spares researchers having to hunt through the vast array of government and private websites?

Corporations, entrepreneurs, researchers and state and local taxpayers will pay much more than what the federal government saves.

It’s a perfect example of what’s wrong with Washington’s approach. The conventional wisdom, a dogma for some, is that federal spending must be cut because government costs more than we can afford.

Yet as the impending demise of the Statistical Abstract exemplifies, proposals for cutting government spending put forth by Democrats and Republicans alike will make the federal government less costly while making America worse off economically.

FISCAL SAND

The mindless rush to embrace spending cuts will throw fiscal sand in the gears of the economy instead of applying the right amount of grease.

The sum the federal government would spend to produce the Statistical Abstract amounts to less than Washington will spend in the first 25 seconds of fiscal 2012, which begins in a month on Oct. 1. Come up with 379,737 more cuts of this size and the projected budget deficit vanishes, at least in the minds of politicians who have conveniently forgotten the concept of cost-benefit analysis.

Last year the online site was accessed 5.6 million times. If the absence of a Statistical Abstract increases search time by even two minutes, then the cost, based on the all-in average pay of reference librarians, will be about five times the federal savings. Were Congress to order up a cost-benefit study, the figure would be a loser, costing society at least $5 for every dollar of tax money saved.

I would not be surprised if the cost to entrepreneurs, businesses and nonprofits was $100 for each federal dollar saved given the pay researchers get and how long it can take to locate data.

The Obama administration is far from unique in failing to think through the implications of spending cuts. Consider Representative Paul Ryan, the Wisconsin Republican who is treated by the press corps as a serious and informed budget expert.

PENNY WISE…

Ryan has twice put forth plans that he accurately says would save the government over the next 75 years the equivalent of more than $5 trillion immediately.

What Ryan did not say is that using the same official data he relied on, the Ryan plan would raise private spending on healthcare by $39 trillion, as liberal economist Dean Baker showed using pure spreadsheet mechanics and the same data source as Ryan. Spending nearly $8 to save $1 is, like killing the Statistical Abstract, just plain foolish.

Of course if the Ryan plan were to become law, that $39 trillion would not be spent because people would not be able to afford it. Many of them would just die sooner, and more painfully, because affordable healthcare would become beyond their reach.

Our Washington politicians are thinking the same way as a girlfriend from long ago whose shiny almost-new Camaro ran like a clunker. She thought not changing the oil saved money. Penny wise and pound foolish.

The truth almost no one in Washington dares speak is that raising taxes can actually put more money in your pocket. My neighbors and I learned this a few years ago when we voted to raise our taxes. For every dollar of added tax my wife and I paid this year we enjoy $1.86 more in our pockets.

How can raising taxes put more money in your pocket? By increasing efficiency.

This year we paid $210 in higher property taxes to finance trash collection and sidewalk snowplowing. Purchased retail, those services would cost about $600. So we spent $210 to save $390. That translates into a savings of $1.86 for every dollar of increased tax. As an added bonus we have just one garbage truck a week down our street, not a different company’s truck everyday, and garbage cans on the street only on Thursday mornings.

What matters in public finance is not how much government spends, so much as what it buys with our tax dollars. But don’t count on the new “Super Congress 12″ committee to undertake serious cost-benefit analysis because cutting spending has become dogma and reality-based policies would be economic heresy.

By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.

Washington politicians say high corporate tax rates are driving U.S. companies to invest offshore where tax rates are lower. But that is not General Electric’s experience.

GE’s disclosures show that over the last decade it paid much lower tax rates in America than offshore, just the opposite of the Washington political mantra. Even more puzzling, the U.S. corporate giant chooses to take more of its profits in other lands despite the higher tax rates there.

Given that GE has a roughly 1,000-person tax department dedicated to paying as little as possible in taxes, what the disclosures show is that something other than tax policy is driving GE’s business decisions.

The law gives companies a great deal of latitude in deciding how to arrange where they report profits from multinational transactions. GE won’t elaborate on why it takes so much of its profit in higher tax jurisdictions offshore.

HIGHER RATES ABROAD

From 2001 through 2010, GE’s total American corporate tax burden averaged 9.4 percent of its profits in American corporate income taxes compared to its 17.9 percent foreign tax rate.

GE’s accounting for taxes, both current and deferred, shows that its American tax rate is just a bit more than half its foreign rate and only about a quarter of the statutory 35 percent rate set by Congress.

Gary Sheffer, GE’s top spokesman, insists that the average 9.4 percent rate over 10 years is misleading because GE suffered big losses in its finance unit that lowered its 2010 American taxes.

“GE’s tax rate was lower than normal in 2010,” Sheffer advised me, because “we lost billions of dollars in GE Capital, our financial arm, during the global financial crisis. Our tax rate will be higher in 2011 as GE Capital recovers.”

But that anomalous year pales compared to the long-term trends.

Break the first decade of this century in two and you can see the trend clearly.

From 2001 through 2005, GE paid almost identical tax rates on its profits, 19.3 percent in the U.S. and 19.7 percent offshore. During those five years GE reported 56.1 percent of its profits in the United States.

But for 2006 through 2010 a number of significant changes show up in the fine print of GE’s 10-K disclosures.

FALL OF 28.3 PCT

First, the share of profits taken in the U.S. fell by half to 28.3 percent. On the surface that fits the Washington political debate that high taxes are driving capital and profits offshore.

But during those same years GE’s offshore tax burden was 28 percentage points higher than its American rate. GE reported tax rates of 16.7 percent on offshore profits, compared to minus 11.5 percent on U.S. profits.

During those five years GE reported $26.6 billion in U.S. profits, but its accounting shows a negative $3 billion tax expense. Offshore the company made $67.3 billion and its taxes by the same measure came to $11.3 billion.

Of that $3 billion negative tax burden over five years, GE relied heavily on business tax credits that Sheffer described as “widely available” and included “the credit for manufacturing energy-efficient appliances in the U.S., the credit for research performed in the U.S., and the credit for energy produced from renewable sources.”

Those business credits, first disclosed in 2006, saved GE almost $2.3 billion. Even without them GE would have reported a tax burden for those five years of minus $794 million or minus 3 percent in the United States. Despite this, GE keeps taking more of its profits offshore where it pays higher taxes, suggesting tax rates are not as crucial an issue as U.S. leaders assert.

Here is another way to look at the disclosures: In 2001 GE’s American tax rate was a third higher than its foreign rate. Its American corporate income tax rate was 28.6 percent, compared to 21.1 percent on foreign profits.

STUDY IN CONTRASTS

In every year since then, GE’s domestic tax rate has been much smaller than in 2001. It reported negative tax liabilities in four of the next nine years.

Offshore, however, GE reported a positive tax rate every year, always in double digits.

Significantly, in 2010 — the year of Sheffer’s focus in response to my questions about the longer period — GE’s offshore tax rate was 22.9 percent, a higher rate than in 2001 and the second highest rate since 2001.

During the past decade GE’s state tax rate also slipped, but not by much. The rate was 3.3 percent in the first half of the decade, but just 2.7 percent in the second half.

Yet another way to look at taxes is the company’s worldwide accounting for taxes, which blends American, offshore and state burdens. Back in 2001 it was 28.3 percent of global profits. Every year since then it has been under 20 percent.  The rate was negative in 2009 and in single digits in 2008 and 2010, thanks to negative tax rates in the United States for those three years.

All these numbers show the same basic trend line — despite higher taxes offshore and much lower domestic taxes, GE keeps taking more profits offshore. That cuts against the simplistic theme of the growing bipartisan consensus in Washington that corporate tax rates must come down.

These facts all raise the question of whether our elected leaders in both parties will stop memorizing talking points and get to studying data points so we get reality-based tax policy. That means paying attention to nuance, including those business tax credits GE relies on so heavily, as well as posted tax rates.

Congress may be blind to such facts, though, because of the money GE spends to influence Washington. Last year GE spent $39.3 million lobbying Congress, roughly $73,000 for every senator and representative. That’s four times what it spent back when its American tax rates, and its share of profits taken in America, were both much higher.