Tax politics

Bruce Bartlett
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Posted: Apr 13, 2004 12:00 AM

 It's that time of year again, when competing interests play battle of the press release on taxes. The goal is to capture taxpayers' allegiance during that brief period when his attention is focused on his tax burden, as he fills out tax forms and, often, writes large checks to state and federal governments. Both sides play this game.

 One longtime player is the Tax Foundation, which annually calculates Tax Freedom Day. Its assumption is that we pay our taxes from the first dollar we earn each year. When we have worked enough to pay all our taxes for the year, we are then free to work for ourselves. According to the latest study, Americans could start to keep all their earnings on April 11 this year, the earliest date since passage of the Kennedy tax cut in the 1960s. This represents a sharp reduction from the last year of the Clinton administration, when Tax Freedom Day fell on May 2.

 Other countries also calculate their Tax Freedom Days. According to the Adam Smith Institute in London, Tax Freedom Day in Britain falls on May 30. The Fraser Institute in Vancouver calculated Canada's Tax Freedom Day to be June 28 last year.

 After many years when advocates of lower taxes were the primary players in the tax game, the tax increasers are now also vigorous participants. However, since no one likes paying taxes and few want to hear about why they should pay more, the tax increasers have to play the finesse game. Their approach is to dramatize the insufficient taxes paid by fat cats. Those of modest means are thereby led to believe that they would pay less if only the rich paid their "fair share."

 Sen. Byron Dorgan, D-N.D., has become the point man for liberals looking to make hay on tax day. Back in 1993, he had the U.S. General Accounting Office look at taxes paid by U.S.-based and foreign-based corporations. The report found that a significant percentage of foreign controlled corporations paid no federal income taxes in the United States. But it also showed that many domestic corporations paid no income taxes, either.

 This initial report got little attention because it was not released until June 11, too late to catch the attention of taxpayers. In 1999, Dorgan wised up and got another report on the same subject out on March 23. This report got a lot more attention by once again showing that many corporations pay no income taxes. However, its main focus was still on foreign companies, even though the percentage of domestic corporations with no tax liability was almost exactly the same.

 This year, Dorgan was even smarter. He got the GAO to do yet another report on corporate taxes, but this time was clever enough to make them get it done by Feb. 27. And rather than release it then, when few would be paying attention, Dorgan got the GAO (which his staff misnames the "Government Accounting Office") to hold the report until his office could release it on April 2, in the middle of tax season.

 Dorgan was also smarter this year in playing up the percentage of U.S. corporations with no tax liability, as well as foreign companies. For this shift in emphasis, he was rewarded with a front-page article in The Wall Street Journal, as well as heavy play in the Los Angeles Times and other papers. With the data showing almost three-fourths of foreign corporations and two-thirds of U.S. corporations had no tax liability in 2000, many individual taxpayers with large tax liabilities no doubt felt some anger and resentment.

 This is exactly what Dorgan was hoping for. It will help pave the way for tax increases on corporations to expand the welfare state and perhaps put Democrats back in control of the White House and Congress.

 Unfortunately, the GAO report provided little context for its findings. It would have been helpful to know that 45 percent of all corporations had no net income and nearly 60 percent had assets of less than $100,000 in 2000, according to the Internal Revenue Service. It is hardly surprising that a company pays no taxes when it has no income and virtually no assets. After all, about 40 percent of individual income tax returns report no tax liability, according to the Joint Committee on Taxation.

 Another point worth mentioning is that all of this alleged tax avoidance came during the Clinton administration. Yet because the data have been released now, many casual readers are probably left thinking that the Bush administration is responsible.

 In the battle of the press releases, Dorgan probably won this year. By the time analysts are able to explain why his data are misleading, tax season will be over.