John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.
Last year the Supreme Court overturned campaign finance reform that limited how much corporations could spend to influence federal elections. UMass Lowell Chancellor Marty Meehan, coauthor of the reform law, expressed the sentiment of many when he said, “I believe this decision will result in influence-buying and corruption.”
It was the latest in a long line of Supreme Court cases dating back to 1819 that relate to “corporate personhood.” The trend is for the court to grant corporations the same rights as individuals.
If you cannot beat them, join them. By incorporating myself, I could lay claim to the rights of corporations when it comes to avoiding taxes.
Last year I took a large (for me) capital loss when a company I used to work for was bought out. I claimed the maximum allowed deduction from income of $3,000 and paid taxes on the remaining income. I had to carry over the rest of the capital loss. Unless tax laws change I will be carrying that loss for a long time.
In the same tax year, many profitable companies paid no federal income taxes. In most cases, it was because they had losses from previous years. Corporations are not limited as to the amount of losses they can write off against earnings. State Street Corp. reported a $1.6 billion profit yet received an $885 million refund. I want part of that action.
I have never run afoul of the Alternative Minimum Tax (AMT). The AMT is a very complicated form designed to make sure individuals do not benefit too much by taking advantage of tax loopholes.
Massachusetts has an AMT for businesses. The corporate AMT is a flat $456. Every year, tens of thousands of companies operating in the Commonwealth pay only the AMT. Some of these corporations are very large and very profitable. Yet, they pay less in state income taxes than I do.
A few weeks ago, I received a refund check from the Internal Revenue Service. I could put it towards adding a room to my house. That will increase the value of the property. However, I would then have to pay higher property taxes to the Town of Chelmsford.
If I incorporate, I could file a request for Tax Increment Financing (TIF). Companies can negotiate for substantial tax breaks by promising to make investments in their property.
TIF agreements can last up to 20 years and exempt between 5 and 100 percent of the taxes on the increased value of the property. In one TIF agreement, Chelmsford gave the company a 90 percent exemption the first year, and the exemption decreased over the next four years.
Companies can negotiate for deals like this because they threaten to take their jobs and go elsewhere. Yet, studies show that taxes are way down on the list when it comes to businesses deciding where to locate. I could threaten to leave because Chelmsford is an expensive place to live, but I do not think it will get me any tax breaks.
If I become a corporation, it does not matter where I live. More than half of all publicly traded companies incorporate in Delaware. They make it very easy to incorporate. Companies are not required to have a physical presence in the state.
Delaware also makes it very easy to avoid taxes. For businesses that just incorporate in Delaware, there is no state income tax, no property taxes, no sales taxes, and no estate taxes. It is hard to ignore a deal like that. It is impossible for an individual to get a deal like that.
I have never ignored the Internal Revenue Service or the tax collection office in Chelmsford. I suspect I would get in a lot of trouble if I did.
Last year the Assessor’s office in Chelmsford proudly reported that in 2010 they had achieved a compliance rate of 55 percent on income and expense statements. That means 45 percent of companies did not bother to file a legally required document used in assessing taxes. Businesses that do not file are subject to a $250 fine. That seems like a small price to pay if you have something to hide.
Not that I have anything to hide, but if I did, it might help to have some elected officials on my side. As an individual, I can donate to my favorite politicians. There are strict limits on how much I can give to a candidate, and I cannot deduct contributions.
Once I am incorporated, I could spend as much as I like to influence federal elections. As an added bonus, I can write off the contributions as a cost of doing business.
I can deduct medical expenses, but only when they exceed 7.5 percent of my Adjusted Gross Income (AGI). Individuals save about $5 billion annually by deducting medical expenses.
Corporations save over $150 billion for employer-sponsored healthcare.
I might be able to save a few dollars more on my taxes if I get a clever accountant. However, I cannot deduct tax preparation fees unless miscellaneous deductions exceed 2 percent of AGI.
Most tax “incentives” for companies are in reality an incentive for clever accounting practices. Studies consistently show they are not an effective strategy for economic growth and job creation. However, companies can deduct tax related spending as a business expense.
In the 1940s and 50s, corporate income taxes were almost a third of federal tax revenue. Now they are less than 10 percent. There have been similar dramatic decreases in corporate tax responsibility at the state and local levels.
The Tea Party should be in revolt over this issue. Except, I do not think most Tea Party supporters understand what the tea party was about. They probably think it was about taxes being too high. In reality, the revolt was over tax exemptions granted to the East India Company.
John Marshall, arguably the most influential Chief Justice of the Supreme Court, said of corporations: “being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it.” While today’s court is conferring rights of personhood, modern-day economic policy is granting rights to corporations not conferred to personhood.
If you want to level the playing field between corporations and individuals, tell your elected officials. You will have a better chance of success if you incorporate first.