March 22, 2012 |Photo Credit: Shutterstock
But increasingly, the biggest punchline of all is a growing breed of firms that are classified as “non-taxable.” That’s right. These firms pay zilch. Nada. Zippo.being.
Take the case of StoneMor Partners, a firm seeking to profit from dying baby boomers, who will need an awful lot of cemetery real estate. The company, whose mission is “to memorialize each life with dignity” might add a second motto to its mission statement: “to capitalize on each tax break with alacrity.”
StoneMor takes advantage of a special structure known as a pass through, in which profits are passed along to investors who pay taxes on those sums through their individual returns. The exception has been around for decades, but lately Congress and state governments have broadened it to encourage “entrepreneurship.” The idea is to help small businesses, which sounds like a good thing. Until you realize that a mammoth private equity company like Blackstone and a massive construction firm like Bechtel, among others, are using this kind of business organization to avoid the taxman altogether.
The percentage of U.S. corporations structured as “nontaxable businesses” soared from about 24 percent in 1986 to about 69 percent as of 2008, according to the Internal Revenue Service. If you include partnerships and sole proprietors, the number gets even bigger.
And there’s more: Up to 60 percent of all U.S. businesses with profits of $1 million are structured as pass-throughs. In the Wall Street Journal, John D. McKinnon points out that their enormous 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.”
Who is in favor of this gross unfairness? Democrats and Republicans alike have failed to make taking it on a priority. Unsurprisingly, a GOP-backed coalition of building contractors, beer distributors, car dealers and funeral directors has been the most vehement in arguing that changing the rules will block “entrepreneurship.”
Does Blackstone, the world’s fifth-largest private equity firm, really need our assistance?
The pass-through structure, in addition to being unfair, encourages fraud that the Internal Revenue Service has a hard time spotting. S corporations, partnerships and other pass-throughs game the system by underreporting income and overstating deductions. Billions in uncollected taxes each year are the result of this scamming.
In an era of laid-off school teachers, uninsured children, widespread joblessness, and crumbling roads and bridges, this is nothing short of obscene. As economist William Lazonick, director of the U Mass Center for Industrial Competitiveness, put it to me in an email:
“Ordinary taxpayers should be outraged by the obsession of business executives with tax avoidance. Our tax dollars have played a major role in funding the physical infrastructures and human capital that support business enterprise. Then they pull out every trick in the book to deprive us of our fair share of business profits. Besides reflecting a profound moral deficit on the part of our business ‘leaders,’ it is a recipe for U.S. economic decline that calls for massive tax reform.”
Obviously, reform to get rid of these loopholes is wildly overdue. Once we decide as a nation what our government needs to spend in order to have a decent and prosperous society and what share of total tax revenues different types of economic actors should pay, there should be no more excuses. And businesses that refuse to pay their share should be called by their proper name: parasites.
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