Bye-bye corporate tax revenues

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Corporate profits are sizzling. Wall Street is cheering. Stock prices are rising again. But Uncle Sam's not getting his full cut. Corporate profits were up 8.9 percent in the fiscal year ended Sept. 30. Federal corporate tax revenues were down 2.5 percent.

Indeed, corporate income tax revenues as a share of corporate profits are sliding.

Washington has its eyes on this oddity, partly for political reasons.

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Shrinking corporate tax revenues opens the door to a hot campaign issue. Democrats could accuse the Republicans of expanding "corporate welfare" - rewarding generous corporate campaign givers with tax breaks. That may be one reason Bill Archer (R) of Texas, chairman of the House Ways and Means Committee, just announced a hearing on corporate tax shelters on Nov. 10. Treasury will be testifying.

Last July, Treasury issued a long "white paper" that began: "The proliferation of corporate tax shelters presents an unacceptable and growing level of tax avoidance behavior."

The Clinton administration wants some tax loopholes closed, increased penalties for companies using abusive shelters and penalties for their promoters or providers, and advance disclosure of tax shelter use.

Mr. Archer described his hearing as "the latest in the committee's efforts to stop abusive tax shelters," and claimed Congress has stopped $50 billion in abuses since 1995.

Nonetheless, corporate tax revenues as a proportion of total corporate profits have fallen to 21.3 percent in fiscal 1999 from 26.6 percent in fiscal 1994. The nominal corporate tax rate is 35 percent.

Revenues actually fell last year to $184.7 billion from $188.6 billion in fiscal 1998.

Lost revenue in fiscal 1999 alone could be $13 billion to $24 billion, estimates Martin Sullivan, an economist writing for Tax Notes, a tax publication in Arlington, Va.

"Lawmakers may no longer have the luxury of delaying consideration of the tax shelter problem," he reckons.

Multinational firms are part of the story. A General Accounting Office study found that 67 percent of foreign-based corporations are doing hundreds of billions of dollars of business in the US without paying a penny of American income taxes.

At a Senate Foreign Relations Committee hearing Oct. 27, Sen. Byron Dorgan (D) of North Dakota charged these foreign companies with "an aggressive accounting scam."

Using a "transfer pricing" tactic, they move US profits out of this country to their home base or another country with a more favorable tax system by manipulating the price they charge themselves for the goods and services they move among related parts of their business. Some foreign-based firms claimed their US operations in 1998 bought toothbrushes for $171 each and pantyhose for $38 a pair. They sold missile and rocket launchers for $13 each and radial tires for $5 apiece.

"This is absurd," Mr. Dorgan said. He added that it may be "draining our Treasury coffers by more than $30 billion annually."

The Senate committee was to meet Nov. 3 to consider approving eight tax treaties, which aim to prevent double taxation involving both the home nation and the US.

Dorgan would like to see such treaties include a "formular" approach to avoid the complex transfer-pricing problem. It would look at sales and assets for allocating profits between countries for tax purposes.

It is the domestic tax situation that's getting the most attention. Last week, for instance, when the Senate passed a bill extending $8.5 billion in corporate tax breaks for a year, House minority leader Richard Gephardt said: "The people who get the real treats are corporations and the wealthy...."

Actually, the Senate "paid for" the extensions by cutting other company tax breaks.

The House Ways and Means Committee also has been weighing a plan for extending six expiring corporate tax preferences. Bob McIntyre, director of Citizens for Tax Justice, a Washington group, calls the $20.9 billion, five-year proposal "corporate welfare."

One final note: Shrinking corporate taxes may be boosting stock prices. That helps the well-to-do who own the bulk of shares.

* David R. Francis is senior economic correspondent for the Monitor.

(c) Copyright 1999. The Christian Science Publishing Society

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