US tax loopholes cost billions annually

[OhioChick]

Source: Reuters

25 Aug 2008, 0943 hrs IST,REUTERS

WASHINGTON: Tax and accounting loopholes that largely benefit rich taxpayers and companies cost the US government $20 billion a year even as the pay gap between chief executives and employees has widened, two groups said on Monday.

The biggest loss comes from a "stock option accounting double standard" that allows corporations paying executives stock options to deduct more than their actual expenses, they said.

For example, when United Health Group Inc paid CEO William McGuire 9 million stock options, it put on its financial statement that the compensation cost the company nothing, according to the Institute for Policy Studies and the group United for a Fair Economy.

But it claimed a tax deduction of $317.7 million, the groups said. That practice alone costs the US government $10 billion a year, the groups said.

A practice known as deferred compensation -- which allows executives to defer an unlimited amount of pay -- costs the government $80.6 million a year, while other loopholes bring the total lost tax revenue to $20 billion, the groups said.


Read more: http://timesofindia.indiatimes.com/Business/US_tax_loopholes_cost_billions_annually/articleshow/3401684.cms

[joeglow3]

1. Kind of misleading

First of all, I am a tax CPA.

I am not an expert on stock options. However, it appears they are only looking at the half of the equation that favors them and ignores the other half. For example, deferred compensation DOES allow an executive to defer paying taxes. However, this is because the company still "owns" the cash and in the event of bankruptcy, the executive loses everything. Additionally, since the company still owns the cash, they are precluded from taking a tax deduction. Thus, while the exectuive does not pay taxes, it is because they could lose it all and it is offset by the tax savings the company gives in until it is actually paid out. Thus, I wonder if they take into account the deferred tax deductions that should offset the deferred tax payments.

[angstlessk]

3. if the company is accrual (as most large corporations are) they can claim

the liability immediately. Not sure what the 'other side' of the booking would be 'officer compensation'..but the article says they do not claim expense, but charge it against their taxes?? I am sure there are some pretty fancy footwork for the rich and well heeled?

[joeglow3]

7. There is a difference between GAAP accrual accounting and tax accounting

They DO claim a deduction and offsetting liability for GAAP. Tax disallows the deduction, resulting in no tax benefit until the amounts are paid out. Payment within 2.5 months of year end is a requirement of Section 461 of the IRC.

[RUMMYisFROSTED]

2. "...that largely benefit rich taxpayers and companies..."

Largely?
Largely?!
Largely!?!

[Lithos]

5. That is because you can always find exceptions

So, there is no absolute. Probably a few consultants and self-employed business people (small store owners, startups) play this as well for similar reasons.

However, Obviously this is a practice that the 99% of the benefit goes to a handful of people who are extremely well off or to companies who really don't need the tax break.

[RUMMYisFROSTED]

6. Therefore, "almost exclusively" would have been more apt.

[Lithos]

9. Yes

That is a way to say it. My only point is to make sure that we are careful in how we approach things. While the example mentioned above is probably not one, I suspect many loopholes were created ostensibly to help a disadvantaged group (family farmers, etc.), but were taken over by corporations and rich individuals. When the loop hole is closed we need to make sure that the original, intended, beneficiaries are not loosing something they need.

Ie, the analogy is that we shouldn't cut off our leg because we have a thousand leeches on it. Let's remove the leeches and preserve the leg.

L-

[TechBear_Seattle]

4. Legislature sanctioned loopholes cost WA $32 billion a year

The state Department of Revenue released a study in 2001 showing that tax exemptions cost Washington some $64 billion -- yes, with a 'b' -- in tax revenue every year. About half of this is unrecoverable, as it represents property tax exemptions guaranteed by the state constitution for federal lands, schools and fire houses.

The remaining $32 billion represents over 330 tax exemptions and "incentives" designed to stimulate business. About half of these were enacted in the early 1930s to provide relief during the Depression. Many are designed to favor specific businesses: even though the state Constitution expressly forbids laws that single out individual persons or corporate entities for special priviledge or punishment, there is apparently nothing which forbids writing massive tax benefit laws with requirements so narrow that only one company can claim the exemptions.

That was in 2001. Since then, the Democrat dominated state legislature has granted nearly 4 billion -- there's that pesky 'b' again -- in tax "incentives" to extremely large aerospace manufacturers (Boeing is the only company in the state that qualifies to take it) over a ten year period and an estimated 86 other tax exemptions. Meanwhile, the state struggles over decreasing revenue due to lost gas taxes (people can't afford gas, so no one is buying it) and is yet again cutting funding for public education, health care services and other vitally important public services.

But as long as the pigs get fat at the public trough, I suppose everything is just peachy-keen. :eyes:

[ihavenobias]

8. Rich people avoiding taxes?!

;)

Yep, it's terrible.

[OneBlueSky]

10. $20 billion seems awfully low to me . . .

I would bet that tax loopholes account for FAR more money not coming into the federal treasury . . .