[Corporations] lies, damned lies and corporate taxes

[Eubulides]

[New York Times]
November 9, 2003
ECONOMIC VIEW
Lawmakers Push Costs of Tax Cuts Out of Sight
By EDMUND L. ANDREWS

PERHAPS it is time for Congress to pass a Truth-in-Advertising Act for tax
cuts.

Both the House and Senate are pushing ahead with bills that would overhaul
corporate tax laws, offering new tax breaks to everybody from rust-belt
manufacturing companies and Texas oil drillers to multinational
conglomerates like Procter & Gamble.

There are many reasons why Congress needs to make changes. For one thing,
the World Trade Organization has ruled that a certain American tax break
for exporters is an illegal trade subsidy and that the European Union is
within its rights to retaliate with up to $4 billion a year in new tariffs
on American products.

In trying to replace the old export subsidy with something new, Democrats
and Republicans alike tend to couch the debate in broad terms. A
bipartisan group in the Senate wants to focus on tax breaks for domestic
manufacturers in the hope of creating (or at least saving) American
factory jobs.

Republicans are seeking more sweeping reductions that include new relief
for American multinationals operating overseas. Representative Bill
Thomas, a Republican of California and the chairman of the House Ways and
Means Committee, is promoting his bill under the dual banners of "jobs"
and "competitiveness."

But there is another issue that has received far less attention:
proponents of both bills are using budgetary sleight-of-hand to make the
tax cuts and their impact on the burgeoning federal deficit look smaller
than they really are.

The Thomas bill, which cleared the Ways and Means Committee in late
October, is supposed to cost the Treasury about $60 billion over the next
10 years. According to the Joint Committee on Taxation, the nonpartisan
Congressional office that estimates the cost of tax proposals, the bill
would create $128 billion worth of new tax breaks. It would offset about
$68 billion of that cost by phasing out the old tax subsidy for exports,
tightening rules against tax shelters and imposing fees for things like
customs duties.

But several of the biggest tax breaks will not take full effect until
eight or nine years from now, which means that the full costs barely begin
to show up inside the standard 10-year estimates produced by Congressional
scorekeepers.

This backloading is particularly heavy in the House bill. One big
provision, a favorite of multinational companies like Procter & Gamble and
Cisco Systems Inc., would make it easier for multinationals to defer
American taxes on profits that cross national borders within the European
Union. The provision would cost the Treasury $10.5 billion over 10 years,
but almost all of it takes effect after 2009. In 2013 alone, the cost
would reach $3 billion and keep climbing after that.

A provision that changes the way multinationals allocate interest expenses
would cost $11.8 billion, but $2.8 billion of that would come in 2013. A
provision to reduce taxes on foreign royalties for American movies would
cost $597 billion over 10 years, but almost all of that would happen after
2008.

HOUSE lawmakers also reduced the apparent cost of their bill by including
"sunset" provisions that end particular tax breaks after several years. A
provision that extends a tax break for small companies and is supposed to
cost $10 billion over 10 years. But that assumes the tax break will expire
after 2007. Congress has a history of extending supposedly temporary tax
breaks.

According to an analysis by the Center on Budget and Policy Priorities, a
liberal Washington research organization, more than half the revenue
losses in Mr. Thomas's bill take place in the last three years of the
10-year forecast.

The issue is not just about shifting costs from one year to the next. It's
about pushing the costs out of view by keeping them outside the standard
forecasting window. Although the cost estimate looks ahead 10 years, most
of the tax cuts go on indefinitely.

"The 10-year cost estimate is thus a poor indicator of the package's true
impact over the long term,'' wrote Joel Friedman, a tax economist at the
Center on Budget and Policy Priorities. Yet it is the longer term that the
federal government faces huge fiscal difficulties as baby boomers start
collecting Social Security and Medicare benefits.

The Senate bill, sponsored by Charles E. Grassley, Republican of Iowa, and
Max Baucus, Democrat of Montana, poses similar issues. Although it is
"revenue neutral'' over 10 years, Congressional scorekeepers estimate it
would lose $4 billion in 2013 and continue to do so thereafter.

These and other time shifts do wonders for the appearance of tax bills at
a time when the federal government is facing a $500 billion budget deficit
next year. But for those who care to look out over the rainbow, the view
is more disquieting.