Last month the Tax Policy Center released its estimate of the percentage of people who will not pay any federal income tax this year. The number has fallen from 47 percent to 43 percent “thanks to an improving economy and the expiration of temporary Great Recession-era tax cuts.” But Roberton Williams, a senior fellow with the Tax Policy Center, commented in Daily Finance that “households that pay no federal income tax are very likely to still be paying other taxes. Those include payroll taxes for Medicare and Social Security, sales taxes and other state and local taxes.”
The same is true for corporations since they pay a range of local, state and international taxes regardless of their federal tax liability. So, those outrage-oozing headlines about corporations paying no taxes are a half truth.
But it turns out that the other half of the “truth” is just wrong.
What those stories miss, or fail to acknowledge, is that the reporters really don’t know how much any corporation pays in taxes, because they are not required to disclose how much federal tax they pay in a given year. What they report is a combined total of state, local, federal and foreign income taxes.
Since distilled federal tax information is not available, the press gathers numbers from “the current portion of taxes due” portion of the quarterly corporate reports. But that number is not intended, used for, or the same as tax liability. Rather, it is for calculating earnings and bears no relationship to what a company will pay in federal taxes. This was pointed out in a Washington Post story. How can that be? The answer lies in understanding that there is a large difference between GAAP (general accepted accounting principles) accounting and tax accounting.
GAAP accounting keeps track of all financial transactions, while tax accounting focuses on business expenses that relate to taxes. GAAP accounting is governed by an independent policy board and uses as its standard commonly accepted methods of recording financial information, whereas tax accounting is influenced by politicians and governed by tax policy makers such as the IRS.
GAAP accounting provides for some consistency in financial reporting amongst varied institutions, but tax accounting focuses on keeping the taxable income from the non-taxable income producing statements that are similar to a tax return.
In short, GAAP’s strict rules and details provide insight into the day-to-day financial functioning of a business, and allows for an analysis of the assets and liabilities of a company. Tax accounting is less strict and, while providing some insight into corporate tax obligations, it rarely provides much credible insight into assets and liabilities. The numbers each method generates has little to do with each other. Hence, “current portion of taxes due” has nothing to do with the tax liability of a corporation.
But reporting current portion of taxes due, typically a fairly small number, allows for big headlines. That is tax reporting math: ½ truth + ½ truth = one big misrepresentation.
October 16, 2013