A quick item to share from the Boston Globe today about the lengths companies will go to avoid taxes. This one from Raytheon is really over the top:

The Waltham defense contractor [Raytheon] unsuccessfully tried to persuade a Massachusetts state tax board that because most of the company's work is done for the federal government, it should be exempt from paying state sales taxes on much of what it buys here - items as diverse as toilet paper, a juke box, and promotional gifts such as golf umbrellas, pins, and key chains.

The Globe article has an interesting narrative about the crazy state of tax policy in America when it explains how items purchased for resale are taxed - it details why Burger King has to pay tax on paper napkins but McDonald's doesn't have to pay tax on the toys included in happy meals. It is worth reading and will crystalize for you how insane it is that Raytheon thought they would get $700,000 - plus interest! - from the state of Massachusetts for snow plowing and office supplies.

This isn't the first time Raytheon has failed to win this exemption from MA. Seems like the Raytheon folks should stick to building missles and leave the tricky tax avoidance schemes to the experts.

(h/t Government Inc.)

The Economic Policy Institute has released the advanced version of The State of Working America, 2008/2009; full version will be available Jan. 2009.

Described as the "most comprehensive independent analysis of the U.S. labor market" by the Financial Times, the 11th edition shows that the business cycle that started in 2001 will be one for the record books....Prepared biennially since 1988, The State of Working America scrutinizes family incomes, jobs, wages, unemployment, wealth, poverty, and health care coverage, describing the economy's effect on our nation's standard of living.

Staying with our current theme of taxes and corporate America, let me direct your attention toExecutive Excess 2008: How Average Taxpayers Subsidize Runaway Pay -- a report from Institute for Policy Studies and United for a Fair Economy.

On Wednesday, I wrote that even though it's wrong to simply state that two thirds of corporations do not pay corporate income taxes, heavy criticism can be leveled at the tax code because it's rigged such that a lot of profits escape taxation. This IPS/UFE report takes aim at tax laws that encourage stratospheric executive compensation while costing some $20 billion annually.

The report notes that 30 years ago, the average American CEO was paid some 30 to 40 times that of the average American worker. In 2007, however, CEOs were compensated at a rate 344 times greater than that of the average worker. While the explosion in the pay gap has many causes, federal tax law has played role. And, aside from abetting obscene executive pay, the $20 billion in forgone revenue could be put to other uses.

All subsidies involve trade-offs. Each time we allow executives and their employers to avoid paying taxes they would otherwise owe, we reduce government's capacity to deliver needed services that taxpayers and their families would otherwise receive.

Tax subsidies for excessive executive pay represent a particularly indefensible waste of government resources. At the moment, no serious observer of the American scene is arguing that top business executives, as a group, earn too little in compensation. So why then should government, in any manner, be encouraging corporations and investment firms to pay their executives even more?

I came in this morning to find my inbox (well, it was actually my Google RSS Reader, but saying inbox sounds better) deluged with more stories about contractor malfesence. A quick rundown for our BudgetBlog readers:

The Wall Street Journal reports that MVM Inc., one of the largests security contractors used by the U.S. intelligence community, has lost a huge CIA contract - worth up to $1 billion over five years. Apparently they were not providing enough armed security guards, which is strange because that was, you know, what they were contracted to do.

Robert O'Harrow Jr. writing at Government Inc. shares some fascinating facts about the use of contractors in the U.S. intelligence community, including the fact we are paying over $3 billion more each year on average for private contractors to carry out intelligence work than if we just hired more government workers. Shocker! (O'Harrow also highlighted a new Government Accountability Office report on August 15 that detailed the 400 percent (yes, I said 400 percent) markup on a contract to provide the next generation of radios for the Defense Department.)

And the darling of the contracting community KBR Inc., was back in the news today in the Washington Post, again not for a good reason. A Washington law firm has filled suit in a federal court in California alleging that KBR and one of its Jordanian subcontractors were trafficing Nepali workers. From the Post article:

Agnieszka Fryszman, a partner at Cohen, Milstein, Hausfeld & Toll, said 13 Nepali men, between the ages of 18 and 27, were recruited in Nepal to work as kitchen staff in hotels and restaurants in Amman, Jordan. But once the men arrived in Jordan, their passports were seized and they were told they were being sent to a military facility in Iraq, Fryszman said.

As the men were driven in cars to Iraq, they were stopped by insurgents. Twelve were kidnapped and later executed, Fryszman said. The thirteenth man survived and worked in a warehouse in Iraq for 15 months before returning to Nepal.

My favorite part of that article is right at the end when a KBR spokeswoman says, "The company in no way condones or tolerates unethical or illegal behavior." Sure. And I've got a bridge to sell you.

Update:
The folks over at TPMMuckraker dove into the specifics of the lawsuit brought against KBR today and have posted more details.

GDP
The Bureau of Economic Analysis released its preliminary estimate of second quarter GDP growth. The BEA estimates that the economy grew at annualized rate of 3.3 percent in the second quarter. This estimate is a bit higher than the advance figure of 1.9 percent, which the BEA released a month ago. The final second quarter GDP number will be released on Sept. 26. In the first quarter of this year, real GDP grew at a 0.9 percent rate.

The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in imports, an acceleration in exports, an acceleration in PCE, a smaller decrease in residential fixed investment, and an upturn in state and local government spending that were partly offset by a larger decrease in inventory investment.

Unemployment Insurance Claims
Also released today were unemployment insurance claims. The Labor Department estimates that in the week ending Aug. 23, 425,000 new unemployment insurance claims were made. The figure is 10,000 fewer than the previous week and reduces the four-week moving average of initial claims from 446,250 to 440, 250. The number of continuing claims rose by 64,000 to 3,423,000.

(Source: Center on Budget and Policy Priorities, "Average Income in 2006 Up $60,000 for Top 1 Percent of Households, Just $430 for Bottom 90 Percent")

After a discussion about federal tax policy and income inequality, Steven Pearlstein strikes the right chord on where the discussion on inequality should be focused. As much as the distributional consequences of the tax code matter, there's still the nagging problem of pre-tax income inequality. Despite major advances in worker productivity over the past 40 years, workers have seen only a sliver of that economic gain.

The reality is that the market's tilt toward unequal outcomes is now so strong that you can't just rely on a progressive tax code to counteract its effects. To do that, it may be necessary to forgo some of those additional tax cuts for the middle and professional classes to pay for increased spending on early childhood education, state colleges and universities, and expanded public health programs. It may be necessary to "tinker" with the markets just a bit by indexing the minimum wage to overall income growth, using the antitrust laws to bust up oligopolies like those on Wall Street and making it possible once again for workers to unionize without fear of losing their jobs. It may even be necessary to slow the pace of further globalization.

There's a good debate to be had on all of these ideas -- every one involves economic risks and trade-offs. But there is no debating that markets are doing a lousy job of distributing the benefits of economic growth and that another decade of stagnant wages and runaway inequality is unacceptable.

No larger point here, I just wanted to flag this for interested readers.

Craig's post this morning on the issue of corporate taxes made me dig through my files to pull up another Government Accountability Office (GAO) report I remember seeing last month about corporate tax compliance. In July the GAO released a report entitled "Businesses Owe Billions in Federal Payroll Taxes," which found, among other things, that businesses owed billions in federal payroll taxes. From the report:

IRS records show that, as of September 30, 2007, over 1.6 million businesses owed over $58 billion in unpaid federal payroll taxes, including interest and penalties. Of that amount, 70 percent of all unpaid payroll taxes are owed by businesses with more than a year (4 tax quarters) of unpaid federal payroll taxes, and over a quarter of unpaid payroll taxes were owed by businesses that accumulated tax debt for more than 3 years (12 tax quarters). Some of these businesses took advantage of the existing tax enforcement and administration system to avoid fulfilling or paying federal tax obligations-thus abusing the federal tax system.

Yikes. That sounds pretty bad. But it gets worse:

GAO selected 50 businesses with payroll tax debt as case studies and found extensive evidence of abuse and potential criminal activity in relation to the federal tax system. The business owners or officers in our case studies diverted payroll tax funds for their own benefit or to help fund business operations. (emphasis added)

While I think Chamber of Commerce spokesman Martin Regalia would be hard pressed to come to the defense of these companies, OMB Watch has larger fish to fry. While the tax evasion and cheating carried out by the 1.6 million companies as detailed in this report is bad criminal unpatriotic vile, what might be worse is the poor tax enforcement system at the IRS that allowed them to not only get away with it once, but get away with it year after year after year.

Although IRS has powerful tools at its disposal to prevent the further accumulation of unpaid payroll taxes and to collect the taxes that are owed, IRS's current approach does not provide for their full, effective use. IRS's overall approach to collection focuses primarily on gaining voluntary compliance-even for egregious payroll tax offenders-a practice that can result in minimal or no actual collections for these offenders. Additionally, IRS has not always promptly filed liens against businesses to protect the government's interests and has not always taken timely action to hold responsible parties personally liable for unpaid payroll taxes.

Hmmm...the IRS doesn't do a good job of collecting taxes. Not really news - we've been saying that for months. But I wonder if the Chamber will be promoting the findings of this report as fervorently as they did the one on corporate tax liabilities. I'm guessing they won't.

The U.S. Chamber of Commerce would prefer that you not know that the U.S. corporate tax code leaks revenue like a sieve. Chamber spokesman Martin Regalia complains about the media's and Sens. Carl Levin's (D-MI) and Byron Dorgan's (D-ND) treatment of a recent GAO report on corporate tax avoidance.

Once again, the GAO data has been twisted and misinterpreted by those seeking to attack corporate America....Many news reports claim that the GAO study revealed that almost two-thirds of companies in the US usually pay no corporate income taxes. What the GAO report actually said was that for the period between 1998 and 2005, corporations — not necessarily the same corporations — had no tax liability for one of the eight years in question.

That's totally a fair point. In fact, on the BudgetBlog last week, Adam rapped Levin for using the term "tax trickery" to explain why so many corporations had no tax liability in at least one year of the report's window. But Regalia does the smart (from his perspective) thing and avoids addressing Dorgan's point that

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.

Right. The statutory federal corporate income tax rate is 35 percent (almost 40 percent when state taxes are included), but 35 percent is really more of a theoretical construct. The tax code has so many loopholes that corporations rarely actually pay that rate on their profits. In fact, according to Tax Analysts, corporations, on average, paid a tax rate of 25.5 percent from 2002 to 2006.

Additionally, the GAO report's timeframe -- 1998 to 2005 -- covers not only the "Dot Com" boom, but also the most recent recovery. By the end of 2005, firms on the S&P 500 had reported 14 straight quarters of double-digit growth. But the GAO report tells that, on average, every year within this time period some two-thirds of all corporations operating in the U.S. paid no corporate taxes. If Regalia's insistence that the GAO report does not indicate mass tax fraud -- a reasonable claim -- is true, then we should all gawk in wonder at a tax code that taxes corporations mostly in theory only.

You can read Income, Poverty, and Health Insurance Coverage in the United States: 2007 here.

Good news for income, not so great news for poverty, and mixed news for health insurance coverage. Here are a few highlights copy and pasted from the report:

• Real median household income increased 1.3 percent between 2006 and 2007, from $49,568 to $50,233 the third annual increase in real median household income.
• Real median earnings of both men and women who worked full-time, year-round rose between 2006 and 2007, following 3 years of annual declines. Men's earnings increased by 3.8 percent to $45,113, women's by 5.0 percent to $35,102. The 2007 female-to-male earnings ratio, 0.78, is an all-time high

• The official poverty rate in 2007 was 12.5 percent, not statistically different from 2006
• In 2007, 37.3 million people were in poverty, up from 36.5 million in 2006.

• Both the percentage and number of people without health insurance decreased in 2007. The percentage without health insurance was 15.3 percent in 2007, down from 15.8 percent in 2006, and the number of uninsured was 45.7 million, down from 47.0 million
• The number of people with health insurance increased to 253.4 million in 2007 (up from 249.8 million in 2006). The number of people covered by private health insurance (202.0 million) in 2007 was not statistically different from 2006, while the number of people covered by government health insurance increased to 83.0 million, up from 80.3 million in 2006.

U.S. Census Bureau: Income, Poverty, and Health Insurance Coverage in the United States: 2007