The Fourteenth Banker Blog

September 12, 2010

Cleaning up Corporate Fraud

Filed under: Running Commentary — thefourteenthbanker @ 6:54 PM

It has been widely commented that there have been virtually no prosecutions under criminal statutes related to the financial crisis. Yet, so many reported transactions and episodes have that slimy feel. They feel like a crime was committed. People feel like they were victimized by a crime.

Some want to justify slimy episodes and transactions on the basis of economic philosophy. George Washington posted this week on the matter under the headline that A Free Market Is Not Possible Without Strong Laws Against Fraud.

Well, as I’ve repeatedly pointed out, the economy cannot recover until trust and the rule of law are restored (and see this).

Imposing accurate accounting standards, stopping high-frequency trading, quote-stuffing and front-running, and prosecuting fraud to the fullest extent of the law are prerequisitesto restoring trust in our economy.

America has a long tradition of using fraud, antitrust, conspiracy and racketeering laws to rein in the worst economic abuses. These laws are an important part of American history, and our recent abandonment of them must be reversed.

George is absolutely correct about this and recent revelations continue to point out the shame of our captured regulators. It was a shocking headline a couple of months ago when the Comptroller of Citicorp was given a virtually free pass on proven and egregious misrepresentations to his own shareholders. His penalty?  A civil fine of $100,000. His compensation in the year he made the misrepresentations? $19.4 million.

This week the SEC was defending its actions in that case.

The Securities and Exchange Commission made its case in a filing Wednesday to a federal judge, who said last month she was “baffled” by the proposed settlement and wasn’t ready to approve it without more information. The SEC said the $75 million penalty is “fair, adequate, reasonable and in the public interest.”

The SEC announced the settlement of unintentional civil fraud charges in late July. The agency had accused the third-largest U.S. bank of repeatedly making misleading statements in calls with analysts and regulatory filings about the extent of its holdings tied to high-risk mortgages. Citigroup had said the exposure was $13 billion or less; the SEC said it exceeded $50 billion.

While Crittenden paid $100,000, Citicorp paid a fine of $75 million. The undisclosed risks ultimately lead to losses of billions of dollars and contributed to a stock price drop from approximately $55 per share to under $1.00 per share at the low. How many investors and citizens lost money in that debacle? How much? What about the taxpayers? $45 billion bailout.

The SEC found unintentional civil fraud. Well excuse me, but that is baloney. The non disclosures were intentional. People who are paid $20 million per year are not unaware of risks involving an extra $37 billion in assets.

Who else knew? CEO Chuck Prince and the disgraced Robert Rubin.

But perhaps the government is learning something. While I do not know enough about Hydraulic Fracking of gas wells to make any claims about whether it contaminates drinking water or not, the EPA request for information this week had a little glimmer of light. It actually asks for individual accountability.

The agency seems to be taking names with this latest request. The letter calls for a corporate officer to certify that the information provided is, to the best of his or her knowledge, “true, accurate and complete,” and it requires the company to specify the source of each piece of information by name, position and title. These two requirements could be important, should the information provided prove to be insufficient or inaccurate.

I had to read several media versions of this story before this little jewel showed up. Requiring an individual to sign a certification will increase the likelihood of complete disclosure, with this caveat. If the SEC and other agencies slap the wrists of those who lie to shareholders, regulators, and the public, then some corporate officials will decide the best bet is to lie, because the upside of the deception exceeds the downside of the penalty.

Are the Citigroup guys “rogue employees”? No. This is our culture, and will be until we change it.

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24 Comments »

  1. How can we clean up corporate fraud when fraud permeates all levels of government, from local towns to counties to states to the Fed, to Congress, to the Supreme Court, and to the Executive Branch? How can you have any hope of cleaning up corporate fraud when there is no longer any Rule of Law for anyone above the peasant class?

    I would go further than to say that “They feel like a crime was committed.” I would say that they know that crimes have been committed for decades.

    I’d also like to take this moment to apologize for my generation — the baby boomers. I don’t know what went wrong, I thought we were about Peace, Love, and Environmentalism. Somehow that morphed into Greed and Selfishness. Even environmentalism morphed into greed and selfishness and fraud. I hope that when my generation is dead and buried, then maybe we’ll see less fraud and corruption in corporations, and government.

    Comment by Eric W — September 12, 2010 @ 11:30 PM | Reply

    • Eric, I’ll tell you what went wrong (fellow Boomer/Flower child here). We lived by the “if it feels good, do it” rule, but our generation also had and believed the unspoken caveat, “as long as you don’t hurt anyone else”. The old Wicca law – “that you harm no one, do as ye will”. But there were those among us who saw the breakdown of the rule of law and justice (pick a movement – from Civil Rights to the War)and then Watergate, to do unto others before they could be done unto. Then, in the early ’80s, “Rocky Mountain High”, met Mr. Gordon Gekko, of “Greed is good, people”. The rest, as they say, is history.

      Comment by Sandi — September 14, 2010 @ 4:02 PM | Reply

  2. what a bunch of crooks

    Comment by tippygolden press — September 13, 2010 @ 12:51 AM | Reply

  3. Not all boomers morphed into greed and fraud.

    The best way to prevent continuing fraud is to apply RICO penalties, particularly the seizure of all assets tainted by the fraud. Current penalties are far too small to deter the fraud. Civil fraud should be redefined to include simple theft and RICO. Frequently the elements of proof for civil fraud are onerous and allow the perpetrator to escape prosecution. Misrepresentation should also be used, and punished in the same fashion.

    SEC has several simpler laws that are not enforced. But then this is the result of deregulation, “Predatory Capitalism”.

    Comment by ella — September 13, 2010 @ 8:56 AM | Reply

    • Damn, this blog REALLY needs a “rec” button!

      Comment by Sandi — September 14, 2010 @ 4:04 PM | Reply

      • Sandi, please clarify for me. Is there a blog widget I could add or was that an editorial comment?

        Comment by thefourteenthbanker — September 14, 2010 @ 4:48 PM

      • I suppose it would be a web widget, but I don’t know how to introduce it. It’s a way to recommend a post – a sort of “Hear! Hear!” 🙂

        Comment by Sandi — September 15, 2010 @ 11:03 AM

  4. Might the real problem be that few crimes were actually committed? We have here a group of people that can afford to fight concocted theories of what constitutes a crime under a given statute. The very essence of capitalism is to remove barriers to replication of capital and profit generation. My job was to smash the tax barrier. Our base legal assumption is that you may until the law says you may not. The next assumption is that application of the law is adversarial. Ahh say there, ahh may. ( Even if clear the law was broken) No suh, you are wrong, ahh wants you in stir? ( Like the comedy My Cousin Vinnie) The state goes whole hog agin you and you go whole hog back. The best hogsmanship decides guilt or innocence. We have university schools teaching barrier piercing. Professors of Entrepreneurship teach the skill in a most direct fashion. Interestingly, a lot of people conjur a feeling of crime . When crime derives from feeling we have a mob reaction. Might all this be heavily influenced by psychobabble generated feelings of victimhood among weak people? It seems clear that every badge wearing Nazi had the feeling that Jews committed crimes. Indeed the Jews were felt to be universal criminals. Anti Semite mob control of the state enabled them to tailor the laws to advance their feelings of victimhood. Right wing societies like that extant in the US are rife with feelings of victimhood. Mostly, these victims brought on their own loss that engendered feeling being victimized by criminals defined in their own minds. Brought on by ignorance of what they were doing while thinking they were smart asses getting rich. Every grifter tries mightily to craft a sting inside the law. The very best grifters are capitalists on Wall Street.

    Might it just be a national characteristic that American’s would conspire to steal the dried sweat off the eyelids of a corpse if they could find a Fence that could sell it? Certainly, the government, not to be outdone, would tax the same dried sweat if they could figure out how to do it. Where I grew up, everyone was trying to solve the corpse eyelid sweat problem. The guy that used the term was a commission bookie with the boys,cops, judges and pols as partners. Everyone got to wet their beaks. A very communitarian endeavor. The town had at least a dozen bookies and many commission books drawing from a large base of wealthy types. The town also had 37 Pin Ball filled saloons with a population of 3000. They did a rip roaring business too.

    Deceit is after all a natural characteristic of survival. Look at Brother Snapping Turtle sitting on the bottom of the local creek. Mouth wide open wiggling it’s tongue to emulate the worm. Along comes little Fishmark going for the kill. Din Din awaits. Snapppp …. dinner earned by entrepreneur Brother Snapping Turtle. Going for the kill turned into killed yourself.

    What this boils down to is how is it possible to maintain a social contract based on hyper application of adversarial principles? We are Snapping Turtles trying to emulate Ants without Ant heiarchy.

    Comment by Jerry J — September 14, 2010 @ 1:37 PM | Reply

    • All good points. But, I don’t believe no crimes were committed. All we can deal with is the black and white. The gray is what it is. We can also learn and codify a few more things to be black. As far as what is in the black, we can attempt to prosecute 2% of it as a deterrent.

      As far as the civil matters go, regulators can toughen up and make the cost benefit calculus different.

      Comment by thefourteenthbanker — September 14, 2010 @ 4:57 PM | Reply

      • Undoubtedly, crimes were committed. The people involved here control the system. The standard for elites is , as a condition of social existence, different than everyone else. The state incentives guarantee such a result if the state minions are less cunning and motivated than the groups having first crack at manipulation of the state to their benefit. Virtually everything that defines how the state survives influence first crack of the elites at manipulation. First, almost all income from Federal taxation is placed primarily in the hands of production / services elite control. These elites organizations act as tax collector with the tax effectively imposed on them. This invites manipulations like the subcontracting scam to kill Social Security and Medicare income to the government . The same scheme imposes private citizen income tax collections on the the elite organizations. It should be obvious that after a time the manipulation of these semi pass through income collection requirements puts the state in a corner. The state is unable to crack down without killing the economic units controlled by the elites. Income taxes are similar. Once a sufficient mass on a tax position is reached , the ability of the state to collect it’s income taxes imposed on the elites is compromised.

        What I suggest is that the state long ago compromised itself by lax enforcement. The state is in the same position as Ottoman Sultan’s. The problem is so widespread he cannot strangle all his minions. Every adversarial system participant seeks to make common cause with his adversary in third party matters. Between themselves they have a wary truce. Both then come out on top. Well, the third party here is the American people. The insurance policy for the elites is owning Congress through electoral financing.

        There has been too little, far too late for a very long time now.

        Comment by Jerry J — September 14, 2010 @ 6:01 PM

  5. The AP is running a piece today that the Federal Judge hearing the 20 state lawsuit against the Obama Health Care Law will go to trial, at least in part. The states argue that the law overreaches in mandating non participating citizens join the plans anyway under penalty. The Federal government relies on the right to regulate interstate commerce. The question here is that 20 sovereign member states say that you may, by right, refuse to participate in the Health Insurance scheme. The Federal union including those same 20 states claims collectively you may not refuse or you pay a penalty that the state can secure by draconian methods.

    The question goes to general agreement on what constitutes the nation and what does not come within the purview of the nation . The twenty states are an awesome percentage of our national sovereign space.

    Just then, what constitures a legally sanctionable crook in matters not even subject to disclosure in the first place? If one does not have to disclose does it not follow that the parties may collude? Given the nature of private contracts like two party or three party tiered Credit Default Swaps collusion is a given because the contract is solely between them. Simplistically, no different than me offering to buy a loaf of bread from the bakery at a price less than the baker charges others because he is a friend. While it should be that a CDS, as an example, should be restricted in the contract it is not. Personally, I often wondered if regulated banks were, by reasonable interpretation, even permitted to directly or indirectly engage in CDS’s? That being so for sake of discussion, the regulators may have logically had statutory discretion to allow or not allow such transactions. Allowing is simply desisting from pursuing the issue. Certainly that is how most regulation is stood down from. All law allows discretion in enforcement in varying amounts by natural result of not choosing to enforce.

    Every corporate player quickly learns to use legal discretion to it’s advantage. They know how far they can go while the citizen thinks narrowly in black and white against those acts that displease them. Similarly, the citizen thinks very widely to their advantage on things that please them. The US has obviously long been a society where the citizen is widely defined by what the citizen is against. Narrow construction, in other words, for those they are against and very wide construction for what they approve of.

    The seeker of profits threads through this fact of life using principles of entreprenurship. Everyone uses hypocrisy as a method of personal survival in the US social system.

    Comment by Jerry J — September 14, 2010 @ 3:35 PM | Reply

  6. Here is a kind of related piece by my favorite Red, Joe Bageant. Linked below. What I am trying to convey is that it is too late for Show Trial’s to be of much deterrent value. Everyone learned from Enron and we all went to school to learn about Sarbox. Forceably sent too. Our problems are forward in nature. Revenge, sends the wrong signal that cleansing a rotten corpse is like Jesus calling forth Lazarus. Lazarus came forth and the system went on as if lazarus still stunk of decay odors. Four centuries later, the Lazarus mythology kicked in to help tide over the classic world in the cocoon while it changed to Feudalism. Our problem is solving for the present not 400 years from now. Show trials may be necessary and the Wall Street Albert Speers must toddle off to the slammer. The base problem is capital growth being necessary for capitalism to survive when growth will no longer be present is ever present. The profit accumulations and recovery of capital from past capital placements must proceed , PLUS new growth to allow for the cycle to repeat itself. The system in the US requires job growth by forcing almost the literal end of finished goods importation. On top of that, energy imports must be virtually ended. There will be an elite ideological reaction against this and in spite of the reaction some imports will be required….. like Rare Earths for the moment. Treasuries will eventually be forced to become legal tender along with heavy restrictions on what foreign holders can spend them on . The sole exception would be to purchase US goods for export. Tit for tat, what! Like coal and foodstuffs and perversely our finished goods because that is the only way they can spend their dollars. What I suggest is so radical that the present elites would drag the nation into break up before they would consent. By then, the time element would have passed. Everyone is aghast at such ideas, yet no one has a way to restore US incomes to the point they would desire to repay their debts. One aspect of creating a desire to pay debts is a resumption of upward prices of real estate. I view that as impossible because the oversupply of existing properties is too vast. Then future real estate turnover will require a 25 % downpayment unless Uncle Sam fronts the downpayment or some other arrangement.

    Prosecutions , while being fun to watch do not address the problems and take away from efforts to cure the problems. The elites will volunteer some of their cadre for the scaffold to buy time to restore status quo ante. They smashed their Humpty Dumpty and being spoiled brats are throwing temper tantrums to mend what is no longer mendable.

    Anyway, here is Joe Bageant ” There ain’t no escape from collapse”

    http://www.joebageant.com/joe/2010/04/there-aint.html

    Incidently, David Harvey in his ” The Enigma of Capital” suggests a new mercantilism is aborning and a China hell bent along imperialist/ mercantilist lines. They ( The Far East nations and others)look to have carefully studied Halford Mackinder, Karl Haushofer and Alfred Thayer Mahan. He suggests that this sort of thinking was forced on the entire Far East after the 1997- 1998 currency debacle. Harvey is hardly alone with this observation. Never again get caught with out reserves of your enemy from which you may dominate. Strangle him not the yourself. The antidote is the unexpected… Turn Treasuries into Legal Tender. They circulate in the real world as money anyway. They have been legal tender in the past. Just restrict the hell out of em. Want to see them in all their glory? google

    http://www.usrarecurrency.com

    We could put the top 10,000 Wall Streeters in chain gangs and it would not change future revolutionary change needed to cure our mess.

    Comment by Jerry J — September 14, 2010 @ 9:35 PM | Reply

  7. Charles Ferguson was interviewed on Market Place (Public Radio International) last night. He’s done a film about the financial crisis. Interview here:http://marketplace.publicradio.org/display/web/2010/09/15/pm-the-financial-fallout-was-an-inside-job/
    His summation of how this environment took root and grew was dead on, IMO –

    Charles Ferguson:What has happened is that a very substantial fraction of the financial services industry has come to be outside the law, and as it has become increasingly powerful, it has attracted increasingly amoral people. Its behavior has become more and more dangerous to the financial system and to the American economy.

    (Which has to be the understatement of the decade!spc) But what was even more troubling, and less realized by the audience, including yours truly, was the extent to which people in high places were ignorant either of their country’s risk, or the risk to the overall system – he mentions Bernanke and Paulson, specifically.

    Comment by Sandi — September 16, 2010 @ 7:55 AM | Reply

    • Sandi, this is precisely my point above regarding predatory capitalism …”outside the law”. Societies everywhere protect their citizens and economies from predation. This is because governments know that the masses needed protection for societies to function, create, labor, and consume goods and services. This is true of both civil law and criminal law.

      Now, we have predation. Companies can cheat their workers, consumers, investors, and governments. Look at all of the off shoring of jobs resulting in labor arbitrage and diminishing the earnings of labor. Consider the amount of manipulated corporate financial records, R&D product records (ie pharma), undisclosed money spent influencing governments, not to mention other dubious actions. Another example is found in permissive off book transactions. Imagine how hard it is to value a company if you are not privy to their off book transactions. Look at companies that move off shore to avoid taxes and yet some of these companies make billions off of government contracts funded by the taxpayer.

      Why should 50%+ of Corps doing business in the US pay no corporate tax? How can billion dollar Corps, pay effective tax rates in the low single digits when many individuals in the middle class pays effective rates in double digits.

      As long as Corporate fraud is allowed to continue we will suffer extreme harm. Their fraud is vigorously pursued because it is PROFITABLE. RICO penalties include the confiscation of all assets tainted by the crime. Once the fraudsters lose all of their assets, the profit motive is destroyed and perhaps they will consider the cost of their behavior.

      Comment by ella — September 16, 2010 @ 9:06 AM | Reply

      • Amen, Ella, amen!

        A more sinister aspect of all of this, which the Titans of Industry (puleeeze) seem not to have considered is one of trust. I believe Fourteenth commented on this recently. You simply cannot have a viable society, let alone marketplace, without basic trust – trust that the other side of the trade isn’t misusing information to defraud you, trust that when you give Mr. Jones your service, he will pay for said service, trust that the sheriff will arrest the bad guys and the judicial system will grant due process, etc.

        Comment by Sandi — September 16, 2010 @ 2:10 PM

  8. The perception that corporations pay low single digit income taxes or no income taxes is another amusing misperception. First, huge numbers of corporations are S Corps that are treated as pass through entities. That is, the shareholders are taxed on their share of the corporation’s taxable income even though they may not have that income distributed. This goes back to 1958. Certainly , most S Corp’s distribute profits sufficient to cover the added tax liability. In most cases that raises the effective tax rate of the shareholder to maximum rates barring shelters that must be constantly rolled over. I was the tax manager of one of the top 5 S Corps and every single shareholder was in the maximum tax bracket on every dollar of their includable S Corp income in their Form 1040. Secondly, those low effective tax rates are mostly due to deferred tax accounting. What they pay is the ” Currently Payable Provision” not the Tax Provision charged to expense. Goldman Sachs had their infamous tax provision last year or the year before of around 6 %. If you read the tax note to the financial statements the Currently Payable Amount was way up there. The Currently Payable Foreign Taxes Provision was around 50 % with a relatively nominal Currently Refundable Federal and State Income Tax Provision netted together. It makes perfect sense that GS would have had a Net Operating Loss in say 2008 and even 2009 because for years prior to 2008 they did not deduct loss provisions on their financial statements on their tax returns. Then, in 2008-2009 they dumped a lot of loss assets on their books that the IRC required they carry at cost. Thus, a Net Operating Loss was generated. The problem was so bad that the big boys successfully got Congress to give them a five year carryback period instead of the more recent two year carryback.

    The Financial statement charge against earnings for Income Taxes is woefully misunderstood. Look at what happened at GM . They had to write off a tax asset of some $41billion. What that means is that cumulatively GM had recognized around $100 billion of taxable income on their Federal and State Income Tax returns that they did not recognize on their financial statements. The write off was required because it became clear they would not have FUTURE TAXABLE INCOME against which they could deduct the higher basis assets created by paying the government that 441 bn in preceding years. Every corporation that has Tax Deferred Assets in excess of Tax Deferred Liabilities has paid taxes on cumulatively higher income than reported in their financial statements. The major source of this dilemma is the requirement to provide for repatriation of foreign sourced earnings including equity in Controlled Foreign Corporations. The write off is heavily composed of expired Foreign Tax Credit carryovers. The government scam here is quite simple to explain with an example. You own foreign corporation X that has taxable income of $100 that pays $50 of it to the Foreign Government. The net was $50. The US owner includes thje $100 in it’s taxable income and may take a credit of say $38 against the tax. Ooops, the US Corporation is losing it’s ass in the US from Finyuppies policies and is making a ton overseas. Gm makes a ton in China and loses even more in the US. Hence, at some point the unused Foreign Tax Credit expires or becomes non viable.

    The Neoliberals kill you the worker and sometimes even themselves, but the USG made sure it got it’s money up front from the Foreign ops. Then it backfired when the US economy was stripped bare. Even GS was bit in the ass because they needed to book forward tax assets to look good. If the credits backfire GS takes a big hit just like GM. This is a hugely complicated area…. Book/ Tax Return computational differences. On an individual basis, I dealt with thousands not counting depreciable asset differences.

    Here again is a proof of just how disconnected things get under collapsing capitalist converging events.

    As an aside. The S Corp was put on the books to avoid double taxation of small businesses organized as a corporation at a time well before Limited Partnerships were generally liable. An S Corp is a Small Business Corporation. Today with LLC’s and LLP’s few corporations are chartered. I took a sizeable C , or regular corporation, over to S status without paying zip special taxes due over the ten year transition period. All of those years were audited and all were ” No Change”. My shareholders would have wet their pants had there been a change due to the corrective filings required of them. Every one of these fifty plus people thought of the Federal government as the great satan. Very amusing.

    I have made it practice to look over as many big finance and energy companies Tax Provisions as I can. I get the annual reports from those freebie distribution services. So far, almost every one has a currently payable provision much grater than the expense charged against earnings. Interesting, every one, so far, has long standing components of increased taxable income over books. Every big finance corporation has massive Foreign Tax Credit Carryovers they book as an asset. That says to me that there are major hits coming to every big finance corporation unless they have very wildly profitable domestic operations for tax purposes.

    Comment by Jerry J — September 16, 2010 @ 11:45 AM | Reply

  9. If you look at the research data you will find that Corps paying no to low corporate taxes is not a misconception.

    Comment by ella — September 16, 2010 @ 1:21 PM | Reply

  10. Certainly, there are C Corps paying low to no income taxes. A great many lose money and have net operating loss carrybacks provided by statute. Others having lost money in the past and having exhausted any carryback ability offset taxable losses against current years income until exhausted if they make enough future taxable income. The tax revenues from corporations net out refunds in any one year against collections. The government bookkeeps on a cash receipts basis.

    Obama recently proposed to allow immediate expensing of capital improvements for new production equipment. Lets say a C Corp earns $10 million for the year. To keep it simple taxable income and financial net income are the same but for a $10 million new factory the corporation carries on it’s books as an asset with no depreciation as yet. The Financial Statement Charge Against Earnings for Income Taxes , at 40 %, is $4 million. Obviously, taxable income would be zero after deducting the Obama tax break of $10 million. The corporation would show Income taxes Payable of Zero. It would show Future Income taxes Deferred Payable of $4 million. The tax expense of $4 million would reduce to net income after income taxes of $6 million.

    So here, a mandatory tax deduction would contribute to corporations paying low or no income taxes. The vast majority of corporations are exempted from income taxes as Small Business Corpororations. A huge percentage of those that must pay Income Taxes lose money and pay nothing or subtract from current corporate income tax collections. Many corporations avail themselves of tax planning and reduce income tax collections further. Far more get screwed by the tax law today than can avail themselves of tax planning if the measurement criterion is compared to financial statement income. The way to figure that out for any given company is when Deferred Tax Assets exceed Deferred Tax Liability. Six figures net out to this number. Currently Deferred Federal, State and Foreign Income Taxes netted against Currently Payable Federal, State and Foreign Income Taxes.

    The corporations are universally now on the accrual method of accounting while the governments are universally on the cash method of accounting.

    Any bets that the Obama proposal , if enacted would not be mandatory. Obama wants the tax subsidy during his term to claim stimulus effect. Discretion to deduct gives the benefit to other future politicians.

    Comment by Jerry J — September 16, 2010 @ 1:55 PM | Reply

  11. Just for the hell of it, I took a quick look at Goldman Sachs for 2009. GS reported pretax income of $19.829 bn and Income Tax Expense of $6.444 bn . That is a tax rate of 30.77 %. GS provided for current income tax payments for the 2009 year income taxes of $ 6.875 % or 34.67 % GS paid out 35 % not 31 %.

    Now for the kicker, yet totally anticpatable by any lower level tax professional. GS has cumulative Deferred Tax Assets of $7.876 bn and Cumulative Deferred Tax Liabilities of $1.611bn. The net is $6.265 bn. What we have here is Caesar’s ten years taxes in advance syndrome. This is particularly so for GS because the biggest contributor of that $7.876 bn is future deduction related to compensation and employee benefits of $3.338 bn. The next two categories relate to not being able to deduct unrealized losses ( Mark to market or impaired) of $2.758 bn. These two items account for $6.096 bn of the net total of 46.265 bn. The rest is potpourri with only a pittance of Foreign Tax Credit carried forward. This means cumulatively using 35 % as an average tax rate that GS reported over $17 billion of income effect items on it’s tax returns than it has shown on it’s financial statements. That is GS paying Caesar in advance. I thought GS owned the Federal government outright?

    So, I sure do question the simplistically presented as fact proposition that corporations pay low or no income taxes. Such facts are used to obscure the raiding by the fat cats. Brilliantly so because all income taxes have the incidence of their tax payments passed on. The trick is to get an offsetting deduction for costs raided out by the fat cats of public corporations.

    Remember the $14 bn Income Tax Expense of GS paid on $2.336 bn of Pretax Profits for it’s November 2007 year? Not even 1 %. Well the current taxes they paid. wrote a check to pay totalled $ 1.777bn. That is a tax rate of 76 % comparing apples to oranges. Yet the perception out there is that GS paid less than 1 % income taxes. 76 % is low to no income tax payments by GS? You bet there is a misperception here. This came right off the comparitive public certified statements GS files with the SEC. Price Waterhouse audited.

    Comment by Jerry J — September 16, 2010 @ 2:52 PM | Reply

  12. http://www.forbes.com/2010/04/01/ge-exxon-walmart-business-washington-corporate-taxes.html “HOUSTON — As you work on your taxes this month, here’s something to raise your hackles: Some of the world’s biggest, most profitable corporations enjoy a far lower tax rate than you do–that is, if they pay taxes at all.

    The most egregious example is General Electric ( GE – news – people ). Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.”
    __________
    http://www.bloomberg.com/news/2010-05-13/american-companies-dodge-60-billion-in-taxes-even-tea-party-would-condemn.html
    “U.S. Companies Dodge $60 Billion in Taxes With Global Odyssey”
    ______________
    http://www.cbsnews.com/stories/2008/08/12/national/main4342535.shtml
    “Two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, according to a new report from Congress.
    The study by the Government Accountability Office, expected to be released Tuesday, said about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period.
    Collectively, the companies reported trillions of dollars in sales, according to GAO’s estimate.”
    _____________
    http://www.epi.org/publications/entry/pm120/
    “Tax breaks for billionaires: Loophole for hedge fund managers costs billions in tax revenue
    Randall Dodd
    July 24, 2007

    This policy memo focuses on the privileged tax treatment given to hedge fund managers that results in a conservative estimate of over $6 billion in forgone tax revenue.”
    _______________
    http://moneycentral.msn.com/content/Taxes/P80242.asp
    http://www.publicagenda.org/charts/federal-budget-revenue-sources
    http://www.boston.com/news/world/articles/2008/03/06/top_iraq_contractor_skirts_us_taxes_offshore/
    _______
    http://www.reclaimdemocracy.org/corporate_welfare/real_tax_rates_plummet.php

    Comment by ella — September 17, 2010 @ 9:07 AM | Reply

  13. Thanks Ella for the links. I will try to do an overview of the Forbes article’s most egregious offender GE. GE is always aggressive.

    Let’s clarify the easiest sensationalism in the links. The reason 2/3rds of United States Corporations pay no income taxes is because most individual corporations are not even subject to the US Corporation Income Tax in the first place. No Tax is legally levied against them. They owe no tax ever unless Congress enacts a tax against them. On top of that more and more business’ are not even organized as corporations in the first place. There many, many more pass through entities than corporations and many more yet compared to income tax paying C Corps. Every tax guy peddles getting out of C corporate status. The only corporations these days that do not convert are those trapped by what is called the ” Built In Gains Problem”. Corporations are a dying legal breed.

    These non corporation ‘Corpus” entities are organized as LLC’s and various kind’s of partnerships. All of these organizations are taxed as pass though entities. For example, most of my nest egg to survive until we die is invested in United States Royalty Trusts. This is a Corpus entity to use the Latin Term. A Corporation. The income passes directly to the shareholders of beneficial interest. Then, Corporations do lose money for tax purposes and thus legally have no corporate tax due. They may even get a refund by carrying back losses to prior years. The carry back applies to everyone including individuals although the small income individual gets screwed royally . If I have past adjusted gross income, I as a person may carry back and forward a current year adjusted gross loss on my Form 1040. Very Democratic.. dontcha know.

    Next, I doubt there is a single hedge fund manager organized as a corporation period. If they are they would long ago, likely from the start, have elected S Corp status. Virtually all hedge funds are themselves pass through entities and the hedge fund managers could be employed on a personal basis. There income goes straight to their 1040. The catch is that the tax law allows their service income to be taxed as capital gains. This has nothing to do with Corpus designations. They bought their little advantage the hard way in Congress with the President assenting to the law.

    OK, US companies not just corporations paying C Corp levied Income taxes do cheat using intercompany strategies. It depends on what is meant by “cheat” here. The first assumption is that Congress feels it rules the world and may dictate the deals in foreign countries. Obviously, US business entities try to run their income through foreign subsidiaries where taxes are low to nil. The Tax Haven angle is simple enough. These states are sovereigns and the right of sovereigns to their own affairs in taxes is absolute absent treaties. The real money is in slave labor states that invite in foreign companies and offer tax deals to protect their business. Even so, for the tax savings to stick the profits must stay in the foreign country. They are taxed the moment a distribution is made to a US corporation . Long ago, the accounting rules required that provision for remission of earnings to the parent be made in consolidated financial statements UNLESS the profits are permanently invested in the foreign country. One big company avoids this by declaring the earnings permanently invested. That company is GE. This is from the 2009 GE Annual Report Footnote. ” We have not provided U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and associated companies that have been reinvested indefinitely.” The government wants that tax money. By implication, shareholders will never receive the benefit of that money reinvested as dividends. Because, non provided or not, if distributed income taxes would be due on the distribution.

    The other area of cheating, and the business people must prevail over the presumption that the government is correct, is through intercomany pricing where the bulk of the profits remain overseas. Note, for this to stick, the business must win , usually in a tax case. The Regulations in this area try to cover all contingincies and that is where wee clever cost accounts make them lose on their own rules. Hey, capitalism is adversarial. The Anglo – Saxon political system is adversarial. This is major reason why commonwealth has been destroyed in the US. Congress could solve tghe problem the old fashioned way … gunboat diplomacy. Watch the movie ” The Wind and the Lion”. Teddy Roosevelt at his very best.

    Ok… GE. GE recorded a tax benefit in consolidation of $1.090 bn. However, GE actually planned to pay taxes of $1.615 bn . The difference between the two numbers of $2.705 bn is an increase in Deferred Tax assets.

    Let’s see. GE had book income before taxes of $10.334 bn and planned to pay taxes of $1.615 bn a tax rate of 15.6 %. That is an apples and oranges number obfuscated by non provision of taxes on foreign earnings repatriation that are permanently invested. As required by accounting rules, GE provides a ” rate reonciliztion” in the Tax Footnote. They start out with a tax rate of 35 % . A reduction of 38.9 % is explained as follows:

    ” ( reduction) in rate resulting from inclusion of AFTER TAX earnings GECS in before tax earnings of GE”. 14th what do you make of this angle????

    GECS is General Electric Capital. Based on their rate reconciliation, Had GE not recoreded their earnings of GECS after taxes, the consolidated tax rate would have been increased from 10.5 % negative to 28 .4 % Put it this way, pretax income of GECS would have increased consolidated pre tax income from $10.344bn to $14.367 bn . Taxes would have gone from negative $1.090 to positive $2.933 bn . The after tax net income would have been the same.

    GE has a NET Deferred Tax liability of $2.173 bn but GECS has a whopping Deferred Tax Liability of $6.793 bn. The the biggest two compnents are Financing and Operating leases with liability between them of $11.767 bn. They have an offset for losses of these leases not deducted of $3.094 bn. This tells me that GECS is able to deduct lease originations from their tax return and not on their books. Undoubtedly, this is a structured transaction arrangement of various types. I presume the arrangements were litigated or agreed to by the IRS. This then , would have nothing to do with payment of corporate taxes since the arrangement is aviailable to all similarly situated. At the same time, GECS had a tax asset of $3.094 bn relating to lease writedowns it did not deduct. GE’s Tax Footnote is about as obscure as I have ever run across.

    Two points . The media angst purveyed is summary horseshit for titillation. The real issue is that were these transactions taxed, they would be taxed to all. It is TRANSACTIONS not corporate status. If that were not the case everyone would become a pass through entity. The government is upset enough about existing publically traded Master Limited Partnerships

    You can tell these articles are titillation because they simply use the term corporation that includes everything but the kitchen sink. Just to summarize. A deferred tax asset represents where the company paid taxes on income faster than reognized on their books. A deferred tax liability is where income on the books was not included in the tax return or where expenses were deducted on the tax return but not on the books. This is all presented to the IRS in Schedule M of the Corporation Income Tax Return and similarly on all pass through entity tax returns.

    Comment by Jerry J — September 17, 2010 @ 2:10 PM | Reply

  14. “It is TRANSACTIONS not corporate status.” This seems to be more applicable to a state like WA. which has a Business and Occupations tax based on the gross revenues. The B&O has very few exemptions and is based solely on transactions. This seems to be a fair way to tax.

    You and I both know that the corporate status is taxed as a status and not as a transactions tax. Thus, you have a tax code which delineates a tax rate and exemptions based on the status, C, & S. A transactions tax would be a sales or excise tax. This is the way the governments categorize taxes.

    The reality is that most all taxes are a form of a transactions tax, a worker is taxed on his salary when the salary is paid (a form of a transaction). Even the estate tax is a transaction / transfer tax. Others are the sale of real estate and some personal assets. Other taxes are use taxes

    The point is what is the effective tax rate paid by corps / individuals and who pays the highest rates or lowest rates. Should corps or individuals making a lot of money pay a lower effective tax rate then the salaried earner making the median?

    While we are at it, should capital be taxed different than labor?
    BTW we are very far OT from the original post.

    Comment by ella — September 17, 2010 @ 3:07 PM | Reply

  15. By transactions I meant, cure the taxable status of transactions that are included within business net income subject to income tax. At the end of the day would the link saying two thirds of all corporations pay little or no income tax be more correct as follows? Two thirds of all C Corporations pay little or no corporate income taxes. I think not and one would be required to qualify that there are large numbers of loss corporations.

    I would tax capital gains at a higher rate than labor if there must be a differentiation. For me that is a starting point.

    Yes, all taxes are in an off beat way transactional in that the incidence of the tax is passed on to the ultimate receiver of the “consideration” or the ” use”. That “consideration” would include a paycheck . The tax lands on the human income or expenditure eventually. The individual human unit pays to receive income and to spend it.

    Personally, I favor a gross receipts collected on deposits in lieu of income and expenditure taxes. I especially favor taxing gross receipts from speculative transactions at the same rate as labor taxes. You sell stock, the tax is on the gross. A CDS is paid off, the recipient pays the same tax. I do realize that, at the start, most government income would come from trading gross receipts. That is purposeful to drive down the level of speculative trading to production and service necessities. Post stabilization of the speculative transactional economy the tax rate would need to increase. I also understand that there is no way such a tax scheme will pass. I fully expect the capitalist structures active today to collapse. I also expect that US political/economic collapse will end the entire first world societies as we understand them. Capital loss seems evident since a huge portion of accumulated capital is invested in promises to pay that will fail from progressive cumulative inability of the debtors to fulfill their contracts. The process is multi faceted with labor arbitrage against the debtors setting off inability to pay. That generates panic losses. Both generate state revenue losses since almost all first world taxes are income, valuation or consumption based. Each segment forces repeating cycle ever greater losses. All fluctate with individual human unit prosperity. Capital is breaking it’s own ultimate customers who they previously grubstaked for a generation or more to boot. And have not been paid. Not too swift but entirely predictable.

    Comment by Jerry J — September 17, 2010 @ 3:51 PM | Reply

  16. 1. “I think not and one would be required to qualify that there are large numbers of loss corporations.” Many Corporate losses are mere loopholes and not true losses, i.e. Corps receiving government subsidies for retiree health care costs and Corps deducting the health care costs from their gross income. http://thinkprogress.org/2010/03/31/boeing-tax-break/

    2. Taxation of Gross Receipts is a good idea, as is driving down speculation. Additionally, a national B & O would assure that all businesses pay some federal tax. One of my ideas for reforming the personal income tax is to tax all gross income regardless of the source with have a flat amount of income deductible for all filers, remainder of the income is taxed at the same rate without differentiation of rates based on the source of the income and no other deductions. Progressive rates attached to various levels of income. This would simplify the tax code and filings.

    3. Labor arbitrage and debt: Debt appears to be the natural result of labor arbitrage. For the last 30 years individual salaries have remained stagnant and the only way to maintain the American lifestyle for many has been the substitution of debt for income. Debt consumption has been encouraged not only by business but also the government. Debt was rarely used for national R & D, infrastructure or other useful goals. Instead it was used to fuel consumption and profits for Corps that offshore manufacturing. Manufacturing is a method of creating national wealth and its diminution in the US has stripped wealth from individuals and government (not only in taxation but in reliance of production of goods and services).

    4. Personal debt levels cannot be maintained, because individuals do not earn enough to pay for the cost of living and their debts plus interest. A quick look at median incomes, housing, auto, health insurance costs, food, and taxes for most wage earners creates a budget deficit. The only way to change the math is to 1. Create more living wage jobs, 2. Assist households in paying down their debt with lower interest rates (i.e. by returning to usury limits), and or discharge the debt in whole or part, or 3. Create a system for controlling the cost of living by allowing governments to compete for services for example mandatory health insurance with a Medicare buy in for all and enforcing the Sherman Act.

    5. “I fully expect the capitalist structures active today to collapse. I also expect that US political/economic collapse will end the entire first world societies as we understand them. Capital loss seems evident since a huge portion of accumulated capital is invested in promises to pay that will fail from progressive cumulative inability of the debtors to fulfill their contracts.” It is not only debtors who are unable to pay, what of banks with high leverage based on deposits … Will they be able to pay? What about insurance companies, pension funds, and other deposits where money is paid to the entity with the promise that the entity will make future payments or payment on demand? Defaults are likely and will cause greater losses from panic and from leverage.

    Comment by ella — September 18, 2010 @ 9:42 AM | Reply


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