October 13, 2004 | WebMemo on Taxes
The nonprofit group Citizens for Tax Justice (CTJ) recently blasted U.S. corporations for increasing their "tax avoidance" behavior during the presidency of George W. Bush. The CTJ report "Corporate Income Taxes in the Bush Years" examines the annual financial reports of a group of large U.S. corporations and purports to show how little these companies paid in taxes from 2001 to 2003. But the report fails to disclose that corporations' tax return data are not publicly available, a fact that makes CTJ's analysis imprecise at best. Because of this shortcoming and other errors, CTJ's conclusion that "loophole seeking-corporations" aren't paying their fair share of taxes falls flat.
Corporations' annual reports can only be used to derive crude estimates of corporate taxable income and taxes paid. The CTJ paper appears to have accounted for some differences between financial reporting rules and tax filing rules, but the paper's discussion of methodology does not provide an adequate explanation of these adjustments. Regardless, it is impossible to account for all of these differences without access to private information.
CTJ also omits other vital details that seriously weaken its conclusions. For example, the paper fails to name any recent tax legislation despite its accusation that Congress and the administration are tweaking tax policy for corporate gain. The following list summarizes the report's major omissions and errors.
Most disturbingly of all, CTJ professes in its report to show the "actual" tax payments of 275 large U.S. corporations, but it never admits that this information is not publicly disclosed and that the report's "actual" payments are merely estimates, and shaky ones at that. Indeed, several companies have publicly taken issue with CTJ's estimates and methodology, and at least one earlier CTJ estimate has been proven grossly inaccurate:
Finally, CTJ charges that Congress and the Bush administration changed the tax laws to benefit "loophole seeking-corporations." But because the CTJ paper does not list any recent legislation and contains only one page on methodology, which is described with few details, it is difficult to evaluate this specific claim.
The errors and omissions in the Citizens for Tax Justice's study of corporate taxation are myriad. CTJ misrepresents its own error-prone estimates of corporate tax payments as corporations' "actual" payments. It mistakes the differences between tax accounting rules and financial accounting rules as evidence of tax avoidance. It ignores the very significant difference between tax strategies that affect the timing of tax benefits and those that affect how much tax is paid. It trades on the recent "stock option expensing" controversy as justification for branding single-taxation (as opposed to double-taxation) of employee compensation as a "tax loophole." CTJ ignores economic trends that would explain some of the drop in the relative share of corporate tax collections. It implies that playing by the rules in tax planning is somehow unjust. And finally, CTJ uses the wrong measure, the average tax rate, to assess corporations' tax rates even though the marginal tax rate, which is usually much higher, is the more appropriate measure. For these reasons and more (watch for a forthcoming Center for Data Analysis Report from the Heritage Foundation), CTJ's "Corporate Income Taxes in the Bush Years" presents an exceedingly misleading picture of corporate taxation in America.
Norbert Michel, Ph.D., is Policy Analyst in the Center for Data Analysis at The Heritage Foundation.
 Robert S. McIntyre and T.D. Coo Nguyen, "Corporate Income Taxes in the Bush Years," Citizens for Tax Justice, September 2004, at http://www.ctj.org/corpfed04an.pdf.
 Sanford Nowlin, "Valero, SBC Hit By Tax Study; Watchdog Groups Say No Income Tax Paid, Firms Deny Figures," San Antonio Express News, September 24, 2004, p. 1C.
 Julie Moran Alterio, Congressional Acts Let Some Businesses Avoid Paying Federal Income Taxes, The Journal News, September 24, 2004, p. D1.
 Citizens for Tax Justice, "Less Than Zero: Enron's Income Tax Payments, 1996-2000," January 17, 2002, at http://www.ctj.org/html/enron.htm
 Gary A. McGill and Edmund Outslay, "Lost in Translation: Detecting Tax Shelter Activity in Financial Statements," National Tax Journal, Vol. LVII, No. 3, September 2004, pp. 746 - 747.