One of the major reasons that Republicans call for lower tax rates on capital gains is the profits from industry are taxed twice; in fact – Paul Ryan and many other Republicans have called for a 0% tax rate on capital gains.  But the reality is that nearly 70% of corporations actually pay no tax whatsoever because they are listed as S-corporations i.e. “small businesses”.  In fact – many large corporations are legally registered as S-Corporations including Koch Industries – a private corporation with over 70,000 employees and run by the infamous billionaire Koch Brothers who collectively are worth more than Bill Gates.

You will regularly hear politicians like Mitt Romney talk about the importance of reducing taxes on S-corporations or “small businesses” as they use small business as a shield meanwhile protecting the very rich. Oligarchs are using this loophole to pay a 15% capital gains tax on profits that have not been taxed at the corporate level.  In fact – Republicans will typically use the S-corporation as part of their stats for small business.

This isn’t even including the 26 mega-large corporations like AT&T, Boeing and Citigroup that paid more compensation to their CEO’s than they did in taxes to the U.S. Treasury HERE.  

The Wall Street Journal has the story HERE:

The percentage of U.S. corporations organized as nontaxable businesses has grown from about 24% in 1986 to about 69% as of 2008, according to the latest-available Internal Revenue Service data. The percentage of all firms is far higher when partnerships and sole proprietors are included.

Old-line U.S. public companies generally remain taxable, and many complain that they must pay higher effective rates than foreign competitors. They are eagerly seeking a cut in the 35% U.S. corporate-tax rate, now one of the highest in the world. But increasingly they find themselves at odds politically with the growing breed of nontaxable firms.

By some estimates, more than 60% of U.S. businesses with profits of $1 million are structured as pass-throughs, the highest rate among developed countries. Their popularity is one big reason why federal corporate tax collections amounted to just 1.3% of GDP in 2010, well below their mark of 2.7% in 2006 and far beneath their peak of 6.1% in 1952.

Jared Bernstein explains how individuals can manipulate the tax code to pay the 15% capital gains rate instead of the 35% marginal rate for individuals HERE:

One reason multi-millionaire investors like Gov. Romney face 15% tax rates is because they engage in corporate activities but avoid corporate taxes.  They do so by taking advantage of policy changes that have made it easier to pass capital gains through the corporation to their personal income, where, in the case of PE managers, they tap a double loophole.  First, capital gains are taxed at less than half the rate of normal income, and second, even though these gains are really earnings for the fund managers, they get to claim them as capital gains (this is the notorious “carried interest” loophole).

The American Institute for CPA’s explains the tax code HERE:

Sec. 1361(b)(1)(D) prohibits an S corporation from having more than one class of stock, defined as equal rights to distributions and liquidations (but not voting rights). Santa Clara Valley Housing Group15 involved an S corporation owned by the Schott family using a technique, SC2, marketed by an accounting firm. The technique allowed the Schotts to convert ordinary income of the S corporation into distributions taxable as capital gains through a multistep plan involving the issuance of stock warrants. The key issue was whether the warrants were a second class of stock and therefore would invalidate the S status of the corporation and cause the distributions to be subject to tax as ordinary income under Sec. 301. The district court in California originally decided that the stock warrants were a second class of stock, but it is currently reexamining the terms of the stock warrants under the safe-harbor rules of Regs. Sec. 1.1361-1(l)(4).16 Two letter rulings17 issued this year allowed the S corporation inadvertent termination relief when warrants were issued.

Here is a sample of some of the huge corporations currently listed as small businesses but making billions in revenues HERE:

• Enterprise Products Partners, L.P., a pipeline company with 2009 revenues of $25 billion.
• Kohlberg Kravis Roberts & Co., a Wall Street firm with $445 million in revenue in 2009.
• Price Waterhouse Coopers, an accounting firm with $26 billion in revenue in 2009.
• Koch Industries, a conglomerate of partnerships with 70,000 employees.
• The Hillman Company, an investment founded by billionaire philanthropist/industrialist Henry Hillman.
• Venn Strategies, Inc., whose chief operating officer is Brian Reardon, a former special assistant to former President George W. Bush.
• Ferrellgas, a propane and propane accessories business, with $2 billion in revenues in 2009 and 1 million customers.
• CoorsTek, a ceramics manufacturer founded by Adolph Coors, with 2009 revenue of $549 million.
• Dead River Co., with $500 million in revenue and 1,200 employees.
• McIlhenney Co., the Tabasco maker, with $250 million in revenue in 2007.

Comments

comments