I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.- Thomas Jefferson.

debt clock

Wednesday, April 21, 2010

Tax Day +6

Do they deserve tax breaks?

Tax Loss Carry Back

Before last year, a company could write off losses against gains in the last two years, so '09 tax losses could be set against '07 and '08 gains. Part of the stimulus plan was a nifty provision that lets companies write off their losses against taxes paid on gains in the last five years, so it now includes '04, '05, and '06. The practical affect is a cash giveaway by the US government as companies claim refunds for taxes paid in previous periods. How big of a deal is it? The Congressional Joint Committee on Taxation estimates the cost to be $33 billion. Who are the beneficiaries of this? A partial list reads like a who's who of companies that greatly assisted in our economic meltdown - JP Morgan ($2.6 billion), Pulte Homes ($867 million) and the two bond insurers MBIA ($502 million) and AMBAC ($440 million). So while average Americans have seen their incomes fall, their state taxes and fees march higher, and are gearing up for higher federal taxes, at least these companies can rest easy with a big bucket of our cash, all thanks to the stimulus plan.

The Greatest Gift of All - GM's Tax Loss Carryforward

General Motors has a problem. Well, actually, GM has lots of problems, but they have one very particular problem when it comes to taxes. They don't owe any. Since 2004 GM has managed to accumulate $88 billion in losses. Then in the Fall of 2008, GM told the world that they were unable to make payroll. The US government stepped in and gave GM $19.7 billion, and a stern warning to get their act together in the next few months or they would have to pay the money back! On the face of it, this made no sense. If the company was broke and you gave them cash to pay their current bills, just exactly what money were you going to take back? In the end it didn't matter, because GM said, "We have no plan, we have no money, and really we have no equity, as our liabilities far exceed our assets." So the US government did the only reasonable thing - stepped in and gave the company an additional $30 billion.

However the story doesn't end there. The US government recast its monetary gift to GM as part loan ($6.7 billion) and part equity purchase ($43.3 billion). Now, put aside for the moment why anyone would pay $43.3 billion for a piece of a bankrupt company, and focus on the process. The US government guided GM through a fast-tracked bankruptcy that was not a reorganization plan. Along the way the government allowed subordinate bondholders to leapfrog secured bondholders, all in direct conflict with existing bankruptcy law and precedence. The US government left the "bad assets and debt" with the old GM which still trades on the stock exchange, and created a new, almost-debt free, unfettered GM that is currently a private company. All of this is important because it means that GM is not, definitely NOT, the same company as the one that operated for over 100 years and near the end racked up $88 billion in losses. However, in another bizarre twist of "make the law what I want to," the US government has allowed the new, unfettered GM to keep all the tax credits it has accrued through tax loss carryforward, which could now be worth about $12 billion.

Normally a company is not allowed to keep these tax losses. If a company did keep the losses, then some devious profitable company would buy the bankrupt company with large tax losses for next to nothing (this fictitious company is bankrupt, so it is not worth anything) and then use the losses of the bankrupt company to offset the taxes in the profitable company. That makes sense. So then, why is the new GM allowed to happily carry around the historical tax losses of the old GM? That's a great question that does not have an answer.

The 36.3%

Finally, there is the very large group of individual tax filers (notice I did not say tax payers) who work and yet pay no income tax at all. According to the Tax Foundation, for 2008 the number of tax filers who owed no federal tax at all was 51.6 million, or 36.3% of the142 million tax returns filed for that year. This is the largest number and percentage of non-payers on record. Now obviously there are many in this group that we would consider the working poor, people who are employed, working hard, but earn so little in their situation (married with children, perhaps?) that paying federal taxes makes no sense. However, it is hard to believe that this situation is true for greater than one-third of all tax filers. Something is definitely amiss.

Not Yet Ready For Prime-Time

For all of our antics over healthcare reform and the stimulus package, American citizens and voters still appear to be mostly uneducated and impotent players in the fight over government spoils. Another year goes by, another tax return filed, and our elected officials continue as they always have - rewarding special interest groups at the expense of the larger public.

Consider that as you write out your check to the "US Treasury."

from Rodney Johnson

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