The Strenuously Hushed-Up Fundamental Flaw In The Tax Code

“Corporate Tax Dodging In The Fifty States [9],” a report that the CTJ released today, found that the largest corporations paid little or no state income taxes in any state for the years 2008-2010. In a prior report [10], the CTJ found that some of the most profitable US corporations paid no federal income taxes over the same period. Both reports point at one of the major problems dogging the US economy: the tax code—and its most fundamental flaw that not even tax reformers dare to mention.

The Internal Revenue Code serves two functions: raise money for the government; and dole out benefits and subsidies to industries, companies, pet projects, individuals, shrimp fisheries, etc. in return for campaign contributions, votes, and fringe benefits such as free plane rides, bundles of cash, sweetheart mortgages, or well-paid jobs for staffers when they move on. It’s the congressional bread and butter. And the economy pays the price.

Tax reform has been in the air in greater concentrations recently. The proposals address some of the symptoms of what’s wrong with the tax code (tax rates, inequality, constraints on business growth, complexity, etc.). But none address the most fundamental flaw that impacts every aspect of the tax code applicable to businesses: the separation of tax accounting from financial accounting.

For example, for the three years from 2008 through 2010, Well Fargo reported $49 billion in earnings, based on Generally Accepted Accounting Principles (GAAP), but it paid zero federal income taxes—it received a refund of $681 million (CTJ [10]). GE reported $14 billion in income in 2010, of which $5.1 billion came from operations in the US. Income taxes? None. Instead, it claimed a refund of $3.2 billion (New York Times [11]).

More