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So what is this “other”? When you examine the Outlay Ledger of the Department of the Treasury for March 2010 (below), you see it to be a one-time item classified as a negative outlay. For the non accountants, this is a government receipt that is placed in the outlays as a negative amount, thereby showing government outlays to be smaller than they otherwise would have been. Though this is acceptable accounting, it would lead to the wrong conclusions, unless you read the details buried in the back pages. This “other” is referred to as a “Proprietary Receipt from the Public.” An IRS document explains just what that means in an accounting context (source: 04-13-10 The Incredible Shrinking Deficit Salon.com):
Proprietary Receipts from the Public are collections from outside the Government that are deposited in receipt accounts that arise as a result of the Government’s business-type or market-oriented activities. Among these are interest received, proceeds from the sale of property and products, charges for non-regulatory services, and rents and royalties.
This is a $117.3 billion amount! The total 2010 US tax receipts for US corporations is only budgeted to be $157 billion!My investigations suggest that it’s likely TARP (Troubled Asset Relief Program) money being returned to the US Treasury, along with a slowdown in TARP issuance versus budget. Assuming this is the case, and not simply an aircraft carrier or two we’ve sold and are now leasing back like California is doing with all state-owned buildings, we still have a major problem. What happens next month? The TARP fund returns will stop or we will run out of aircraft carriers. Is unemployment going to surge or are corporate tax receipts going to expand by over $117 billion next month? Timothy Geithner and the US Treasury somehow dodged the bullet because of “other” this month. How does it look for next month for cash management? Let’s consider tax receipts to see if there is a possible rabbit in the hat there.Tax Receipts You personally met your April 15 tax filing deadline and you likely took some consolation in your tax frustrations by knowing you weren’t alone. The quiet truth is you’re becoming more alone each year if you haven’t understood the new realities of the US tax game. Forty-seven percent of Americans (source: Nearly Half of US Households Escape Fed Income Tax -- AP) and two-thirds of US corporations (source: 04-11-04 Most US Firms Paid No Income Taxes in '90s -- Boston Globe) will pay no taxes in 2010. Where do you fit? These are pretty startling revelations to most of us and don’t bode well to fixing the monthly Treasury cash requirements quickly, especially with unemployment still stubbornly elevated.Personal Income TaxThe Associated Press reported on April 7, 2010:
With the government presently talking about once again extending unemployment benefits, it appears we have more downside than upside on the income tax revenue receipt line item going forward.Corporate TaxThe Center for American Progress reported in 2004, while fighting President George W Bush’s further cuts in corporate taxation:
The news that more than 60 percent of US corporations failed to pay any federal taxes from 1996 through 2000 when corporate profits were soaring and that corporate tax receipts had fallen to just 7.4 percent of overall federal tax revenue in 2003 -- the lowest since 1983 and the second-lowest rate since 1934 -- is an outrage. But it should come as no surprise to anyone who has been paying attention to national tax policy over the past few years. The General Accounting Office (GAO) report also found that an astonishing 94 percent of corporations reported tax liability of less than 5 percent of their total income during the same time period.
The last special General Accounting Office (GAO) study concerning corporate taxation was in 2004 and it showed:
The corporate income tax rate is ostensibly 35 percent, but companies are able to reduce their effective burden by claiming various deductions and credits. US companies paid an average of $11.88 (1.19 percent) in corporate taxes for every $1,000 in gross receipts, the study said. Foreign-owned companies fared better in some respects than their US-based competitors. The report found that 71 percent of foreign-controlled corporations paid no taxes on their US income, while 89 percent had liabilities of less than 5 percent of their income. The GAO didn't attempt to determine why so many companies were able to avoid paying taxes. It said possible explanations included legitimate deductions for current-year operating losses, losses carried forward from previous years, and sufficient credits to offset any tax liabilities. In addition, it said improper pricing of transactions between US and foreign operations could contribute to tax avoidance.The percentage of federal tax collections paid by corporations has tumbled from a high of 39.8 percent in 1943 to a low of 7.4 percent last year. It ranged from 10 percent to 11 percent in 1996-2000, the period studied by the GAO. (Boston Globe 04-11-04)
In 2005 the GAO issued another report. The Washington Post’s analysis in "Many Firms Didn’t Pay Taxes" highlighted:
About two-thirds of corporations operating in the United States did not pay taxes annually from 1998 to 2005. In 2005, after collectively making $2.5 trillion in sales, corporations gave a variety of reasons on their tax returns to account for the absence of taxable revenue. The most frequently listed included the cost of producing their goods, salary expenses and interest payments on their debt, the report said. The GAO did not analyze whether the firms had profits that should have been taxed. Sen. Byron L. Dorgan (D-N.D.) called the findings "a shocking indictment of the current tax system." "It's shameful that so many corporations make big profits and pay nothing to support our country," he said. "The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls." Eric Toder, a senior fellow at the Urban Institute, said the vast majority of corporations are small businesses and start-ups that have adopted a corporate structure that allows them to lower their tax bills. "I'm not trying to imply that there aren't tax-compliance issues among small corporations," he said. "But when you are talking about businesses that size, I would suspect the norm would be to not pay taxes, and there's nothing nefarious about that." Toder had not yet seen the GAO study. A greater proportion of large corporations pay taxes, according to the GAO. In 2005, about 28 percent of large corporations paid no taxes. Of the 1.3 million corporations included in the study, 998 were categorized as "large." Dorgan and Sen. Carl M. Levin (D-Mich.) requested the report out of concern that some corporations were using "transfer pricing" to reduce their tax bills. The practice allows multi-national companies to transfer goods and assets between internal divisions so they can record income in a jurisdiction with low tax rates. The GAO said data on transfer pricing were scarce. Instead, it compared the percentages of foreign- and U.S.-controlled corporations that are paying taxes. In general, the GAO found that slightly more foreign firms paid no taxes. From 1998 to 2005, 68 percent of foreign-controlled corporations sent nothing to the Internal Revenue Service, compared with 66 percent of U.S. companies. The report noted in an opening paragraph, however, that the GAO did not study whether the foreign companies were using transfer pricing. Still, Levin said: "This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States."
A Horrific ChartThis alarming chart suggests one or more of three possibilities:1. There’s no relationship between corporate taxes and GDP.2. Corporate pretax profits have seen near exponential growth over the last 30 years without being reflected in US taxes receipts. 3. Pretax corporate profits have become more and more an offshore phenomenon.
In an analysis of taxes paid by 275 of the largest U.S. corporations, the liberal watchdog group Citizens for Tax Justice found that effective corporate tax rates have fallen by 20 percent since 2001, even as pretax profits jumped 26 percent. Between 2001 and 2003, the 275 companies paid taxes totaling 18.4 percent on their total profits, about half the 35 percent corporate income tax rate. Of the 275, 82 either paid no taxes or received large refunds in at least one of the past three years. (The Washington Post 12-26-04)
Investors are operating under the notion that an improvement in the economy and employment will alleviate the pressures on the Treasury auction. This notion I believe is misplaced. Though I’m skeptical about significant improvements in either the economy or employment, this view is moot in comparison to what will actually be required to make a material difference to tax receipts. The problems described above are intractable without major congressional policy initiatives. Congress is presently doing nothing to address them. In fact they’re headed in absolutely the opposite direction.Corporate and personal taxes aren’t going to materially fix the US cash crunch short-term.So the question is even more difficult to answer. Where will tax receipts come from to keep the US Treasury from being forced to place accelerating supply on the monthly Treasury auction?Debt IssuanceI know many of you are saying we’ll just be forced to place more supply on the Treasury auction and accept higher rates. As I mentioned earlier, the US has already moved down the duration curve steadily over the last few years to make increasing debt levels less onerous. It obviously comes with huge risk, considering interest rates are at all-time historic lows.If we were forced to refinance the national debt at 5.5% versus the present average maturity of just over 2%, we’d have a serious problem. We need to place corporate tax receipts versus interest payment rate charges in perspective.This is too far out to be critical to our monthly cash management concerns, but is still a major strategic consideration affecting short-term US Treasury auction options. Closer in however, the US Treasury is obviously caught in a vise about not pushing rates up any faster than absolutely necessary for concern that in the not-too-distant future the very existence of the US and its ability to service its debt may be at stake.Conclusion The US cash-management challenge is significant. Taking out this month’s “plug” number, any surprises or further delays in economic rebound will likely trigger serious market reactions. "This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics."-- Moody’s Investor Services
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