On Corporate Tax Avoidance, Critics Take Aim at ITEP – and Miss
October 25, 2023
October 25, 2023
Corporate tax avoidance is so unpopular that its defenders have only one viable tactic: Change the subject and confuse the debate. This has become increasingly apparent as critics attack ITEP’s research for making claims that it, in fact, has never made.
Take Douglas Holtz-Eakin, former director of the Congressional Budget Office and head of the American Action Forum. He distributed to Congressional staff his most recent complaints about ITEP’s study finding that 55 large, profitable corporations did not pay federal income taxes in 2020, at the height of the pandemic.
President Biden’s frequent references in his speeches to these 55 companies helped pave the way to the passage of the Inflation Reduction Act, which includes a provision to crack down on tax avoidance by the largest corporations.
“The problem?” Holtz-Eakin writes, “There is zero, zero, zero evidence of any tax evasion or even tax shenanigans in these reports.” He adds: “These firms take advantage of congressionally passed, presidentially signed, U.S. tax law (legal) provisions that reduce their taxes.”
Holtz-Eakin either has not read the report he is criticizing, or he is knowingly misrepresenting it.
ITEP does not claim that the corporations in its report are committing the crime of tax evasion. Rather, our report illustrates the problems that result from the tax laws enacted by Congress, demonstrating why those laws should be changed.
In the report in question, we explain – in the second sentence of the report – “This continues a decades-long trend of corporate tax avoidance by the biggest U.S. corporations, and it appears to be the product of long-standing tax breaks preserved or expanded by the 2017 Tax Cuts and Jobs Act (TCJA) as well as the CARES Act tax breaks enacted in the spring of 2020.”
ITEP’s reports show that corporations often pay little or nothing relative to the profits that they tell the public and their investors they are generating each year. Most people, including many lawmakers, find it problematic that companies tell their shareholders they are profitable yet pay only a tiny fraction of those profits, if anything, in federal income taxes. (Other ITEP studies identify corporations that report profits annually for several years in a row and are still able to pay little or nothing in federal income taxes during those years.)
Holtz-Eakin objects to this as well, arguing that “taxable income is a very different concept than financial reporting income,” which is another way of saying that the tax code defines corporate income differently than the financial accounting rules that govern how profits are reported to shareholders.
He previously explained his argument in more detail, saying that Congress enacted tax provisions allowing corporations to report less income to the IRS than they must report under the financial accounting rules governing what they report to the public. Corporations, he says, are simply following these provisions.
We agree that corporations are following these tax provisions – provisions that are more commonly known as “tax breaks.” We think Congress has enacted too many of them. We think the evidence illustrates that these provisions have allowed too many corporations to avoid taxes. If Holtz-Eakin disagrees with us, he should say so. Instead, he keeps changing the subject to whether corporations are following existing tax laws.
Perhaps he has not read the ITEP report he describes, at least not past the first sentence. Or maybe he knows that his views on corporate tax policy are so wildly unpopular that it is easier for him to change the subject. Large majorities of Americans have long believed that corporations should pay more, not less, in taxes. People like Holtz-Eakin would face an uphill climb in trying to convince them otherwise.
Other critics offer similar, incoherent arguments. During the debate over the legislation that eventually evolved into the IRA, two accounting professors published an op-ed arguing that ITEP should stop “shaming” corporations with low effective tax rates and that “vilifying corporations with low rates without any actual evidence of wrongdoing is counterproductive.” Instead, they complained, we “need to have conversations about real tax issues.”
There is no language in our studies shaming or vilifying corporations – unless you count merely pointing out when they pay little or nothing in taxes. Like Holtz-Eakin, they suggest that a “serious” discussion of tax policy is needed, which, in their minds, would not involve real life examples of how our tax system is working.
But ITEP has published many reports along these lines, going into the details of specific corporate tax policies and explaining how Congress could fix them. These critics never respond to those reports. They only pay attention when we identify specific examples of corporations paying or not paying taxes.
And this is their prerogative, but they have unwittingly confirmed something that we have long known. Many people will think about and talk about corporate tax policy only when confronted with the evidence that many companies are paying little or nothing.
In identifying companies that avoid taxes, ITEP presented evidence that our federal corporate income tax was not working the way most Americans think it should work. The public and lawmakers paid attention, including President Biden who then made the case that this demonstrated the need for reform. As a result, Congress enacted the corporate minimum tax, to make the tax system a bit closer to what most Americans want it to be. If you look closely at this, you might just see an example of democracy working.