Tax Group Uses Shoddy Methods


Tax Group Uses Shoddy Methods

Mar 3, 2005 3 min read

Former Director, Center for Data Analysis

Norbert Michel studied and wrote about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.

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 years.

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 report.

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 taxes.

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 wrong."

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 individuals.

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.

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