March 3, 2005
By Norbert J. Michel, Ph.D.
Everybody knows the phrase "close enough for
government work" is a joke, but few people would claim that it
applies to the IRS. Although it might be tempting to fill in your
tax forms by saying you owe "between $0 and $5,000" and then remit
nothing to the IRS, this probably isn't a wise strategy.
So why does Citizens for Tax Justice keep recycling corporate tax
estimates that are "close enough"? It doesn't seem to bother the
group, because it's been using the same flawed methodology for
Citizens for Tax Justice is a labor-funded nonprofit group that is
frequently cited as an authority on tax policy. Yet the details of
their reports are virtually ignored.
CTJ uses corporate annual reports to "prove" how little companies
have been paying in taxes at the state and federal level. In its
most recent report, for example, CTJ analyst Robert McIntyre bashes
Merrill Lynch for not paying any state taxes from 2001 to 2003. But
he fails to prove that incendiary statement.
For example, suppose CTJ wanted to see how much Merrill Lynch paid
in state income taxes to West Virginia in 2003. Well, the group
can't use the company's tax return, because that is private
information (just like every individuals' tax return).
So CTJ goes to Merrill's annual report. But
while Merrill does report an annual figure for all "state and
local" taxes, this figure isn't broken out by jurisdiction. In
fact, none of Merrill's operating results are reported on a
state-by-state basis. That's not the purpose of an annual
But no matter. CTJ is still happy to use the annual report figure.
First, it has to adjust the total because there are certain tax
laws that don't match accounting rules. Unfortunately, without the
corporate tax return, there is no way to accurately adjust the
number in the annual report.
But CTJ doesn't let this little problem stop them. It adjusts for
only those tax-law/accounting rule differences that can be
estimated with what's in Merrill's annual report. When using this
method, it appears that Merrill paid absolutely no state income
taxes to any state.
This could be totally incorrect, because there are so many
differences that cannot be accounted for with just the annual
report. Nobody would try to calculate his or her personal taxes by
using nothing more than a checkbook register, but that's basically
what CTJ has done.
But why quibble? CTJ now has "evidence" that Merrill is
shortchanging every state in the country, so it uses it. After all,
it's because companies like Merrill aren't paying taxes that
everyone else has to pay more, right?
Wrong. This is pure sensationalism. But it's exactly what the folks
at Citizens for Tax Justice have been doing for years. Worse, I'm
not sure they understand the problem: When I laid out the flaws in
their methodology to Robert McIntyre- and asked why he persisted in
using this "methodology" to claim big corporations pay too little
in income taxes- he replied that he had Merrill's "audited
financial statement" and that's all he needed. But, as we've
already seen, he needs more - a lot more.
In fact, CTJ has continued to use this flawed method for estimating
corporate taxes even though its figures have been proven wrong
before. In January 2002, for instance, CTJ claimed that Enron had
received a net refund of $278 million on its 2000 federal income
Congressional hearings soon revealed that Enron actually had paid
$63 million in federal income taxes. Other companies, such as SBC
Communications, Pepsi, BB&T and Lexmark, have taken issue with
the numbers in CTJ's most recent papers. Not surprisingly, the
companies' response is typically along the lines of: "We have no
idea where Citizens for Tax Justice got those numbers, and they are
But Citizens for Tax Justice's single-minded purpose is to convince
people that if companies pay "their fair share" in taxes, people
will have to pay less. But just like Citizens for Tax Justice's
methodology, so too is their logic unsound.
Corporations don't pay taxes, people do. Corporations are simply
legal entities. Every dollar that "a corporation" has to pay in
taxes ends up being paid by customers, employees or owners of the
corporation. In other words, all of us.
Either way, "people" pick up the tab. There is no "corporate beast"
bearing the burden of corporate taxes so that people get government
services for free. It is incorrect to assume that taxes can be
raised on "corporations" without taking money away from
The people at CTJ certainly know that as well as anyone. But they
don't seem to care. That's why their figures on corporate tax
avoidance simply don't add up.
Norbert Michel, Ph.D., is a policy analyst in the Center for
Data Analysis at The Heritage Foundation, a Washington-based public
policy research institute.
First appeared on FOXNews.com
Everybody knows the phrase "close enough for government work" is a joke, but few people would claim that it applies to the IRS.
Norbert J. Michel, Ph.D.
Research Fellow in Financial Regulations
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