Under GAAP, public companies are required to disclose in their footnotes included in their annual reports, their best estimate of what they owe in total to all taxing authorities for all of their open tax audit years. The bulk of these amounts disclosed relate to the amounts owed to the US Federal Government. Also included in this total are amounts owed to State Governments and to Foreign Governments.
I did a very quick review of some US large corporation footnotes and from just my very limited review, I found 106 companies that had amounts owed for all open tax audit years in excess of $300 mil each, that in the aggregate totaled $176.8 bil at the most recent year end, which for the majority of these companies was December 31, 2008. This total amount owed for these 106 companies was up 13.4% from the $155.9 bil owed one year earlier. And that 13.4% increase was registered in a year where taxable income of corps was severely hampered by a deep recession.
It takes a very long time for these companies to settle their tax audits with the IRS and other taxing authorities. For these 106 companies, there was an average of more than 8 years of open tax audit years.
My proposal here is for all companies which have estimated liabilities to all taxing authorities for all open tax audit years of in excess of $100 mil, for these companies to make estimated income tax payments, or deposits, to the IRS each year on all open tax audits, such that these cumulative tax deposits as a cumulative percentage of what they claim they owe the IRS at the following calendar year-end dates, are at least equal to:
By Dec 31, 2010….2%
By Dec 31, 2011….4%
By Dec 31, 2012….6%
By Dec 31, 2013….8%
By Dec 31, 2014…10%
By Dec 31, 2015…12%
By Dec 31, 2016…14%
By Dec 31, 2017…16%
By Dec 31, 2018…18%
By Dec 31, 2019…20%
Thus, if a company estimates that it owes the IRS $200 mil in total for all open tax years at Dec 31, 2010, then the cumulative tax deposits by that date must be equal to at least 2% of $200 mil, or at least $4 mil.
And then if a company estimates that, before considering the related tax deposits already made, it owes the IRS $500 mil in total for all open tax years at Dec 31, 2019, then the cumulative tax deposits by that date on these open tax audits must be equal to a total of at least 20% of $500 mil, or $100 mil.
When you think about it, this very modest tax deposit of only 20% of what a large corporation admits it owes is an absolutely incredible deal to this corp. Presently, large corps make quarterly estimated tax payments equal to 25% of what they owe annually in their tax return as filed. Thus, after their 4Q estimated tax payment for a year, the cumulative tax deposits for the year are equal to 100% of what is owed.
Let me roughly estimate what I think is a fair CBO scoring for this proposal.
For my limited sample of these 106 companies with total estimated liabilities above $300 mil each, the aggregate tax liability for the most recent year, or mostly at December 31, 2008, was $176.8 bil. Projecting that amount out eleven years using the same 13.4% annual increase of 2008 over 2007, the estimated total tax liability, including accrued interest, at Dec 31, 2019 would be $705 bil. My estimate is that the US IRS piece of that total would be somewhere between $500 bil to $600 bil. Contributing to this high US IRS portion is the tendency of some large multinational corps to shift income from the higher-taxed US to lower-taxed international tax havens, with the resultant US tax exposure upon subsequent IRS tax audit.
And then I would need to add the companies I excluded from my sample, including the many companies with estimated liabilities to all taxing authorities for all open tax audit years ranging from $100 mil to $300 mil, and also the many foreign corporations operating in the US and owing at least $100 mil for their open tax audits. Thus, the total US IRS tax liability piece would be at the very least in the range of $600 bil to $700 bil at December 31, 2019.
And it should also be pointed out that this Dec 31, 2019 tax liability on open IRS tax audits projection assumes the present extremely low interest rate environment will continue for the entire decade. In reality, interest rates will rise (later I talk about the very steep variable interest rate used by the IRS), and thus any reasonable interest rate used would drive this tax liability close to $1 trillion.
The positive CBO scoring here for the ten-year period would be 20% of this $600 bil to $700 bil, or $120 bil to $140 bil…..that I think should be used first to fund only real, measurable, desperately-needed Job Creation, that can be objectively CBO confirmed as clearly worth the cost, unlike some of the projects included in the present US House Main Street Jobs proposal and some included in last year’s Economic Stimulus Plan. And if there are any excess funds, I think they should all be used to reduce the US federal deficit.
And then there is always the opportunity to kick up this 20% to say 50%…..after all, this is not the large corp’s money, it belongs to the US Government, and thus it’s the US citizens’ money. This 50% assumption would result in positive CBO scoring in the range of $300 bil to $350 bil.
And I think this money should be used first to fund only long-term job-creation initiatives, properly designed and CBO objectively confirmed; and second to fund a substantial reduction in the US federal deficit.
After first allocating the substantial portion of this money to these two critical country needs (i.e. focused like a laser on just true, measurable job creation and on US federal deficit reduction), I would then consider allocating some of the excess funds to carefully selected infrastructure projects. At the very end of this post, I have an example of one very wise infrastructure invesment...in High Speed Mass Transit Systems.
And then I would also consider allocating some of the excess funds to well-designed, specially-tailored employment training programs for military veterans (perhaps, let Jack Reed design it) and for prison rehabilitation (let Jim Webb design it). Also, there should be special hiring programs for both military veterans and for released prisoners. I also would consider allocating some of the excess funds to targeted and very healthy tax incentives to employers for hiring and retaining military veterans and released prisoners. Whoa, the unemployment rates for these two groups are just too unacceptably high, even when the economy is strong.
For these companies making these tax deposits, there would be no earnings charge to them since these estimated liabilities are already recorded on the books. These companies would be simply partially paying, on a staggered-in basis over the next ten years, a small portion (20% to 50%) of what they agree they owe the IRS.
Also, there should be no negative economic impact to these companies. Further, these tax deposits made would stop the subsequent accrual of interest. In fact, nearly all of these large companies will be able to obtain financing for these tax deposits at a much lower interest rate than they would ultimately have had to pay to the IRS. Believe it or not, the IRS presently charges large corps interest at the federal short-term interest rate plus five percentage points.
Stockholders of these companies should buy into this Job Creation Funding proposal since they should want their companies to obtain the much cheaper outside financing on their debt than that provided by the steep financing required by the IRS.
In addition to the very favorable company financing mentioned above, another economic benefit here will accrue to the US States, since they could choose to require a somewhat similar tax deposit scheme for companies for all of their open state tax audits, and thus the present dire financial status of States could thereby be improved from the accelerated state tax deposits the States will be receiving.
Given how large US corporations will benefit greatly from the various Job Creation and Stimulus Proposals, I think it is only fair that these large corps make tax deposits that total only a very modest 20% to 50% of the amounts they agree that they owe to the IRS, staggered-in over the next ten-year CBO scoring period.
For the 106 companies I sampled, here is a listing of the 44 companies that had estimated tax liabilities, including accrued interest, of in excess of $1 bil each owed in total to all taxing authorities for all open tax audit years at their most recent balance sheet date.
1 Wells Fargo……………….. $9.1 bil
2 Pfizer/ Wyeth…………….. $8.2 bil
3 JP Morgan Chase………… $8.2 bil
4 GE………………………….... $8.0 bil
5 ATT………………………….. $8.0 bil
6 Merck/Schering Plough. $6.6 bil
7 Microsoft…………………... $6.0 bil
8 Bank of America…………. $5.9 bil
9 Exxon Mobil………………. $5.6 bil
10 IBM…………………………. $4.2 bil
11 Citigroup………………….. $4.1 bil
12 AIG………………………….. $3.8 bil
13 Morgan Stanley…………. $3.7 bil
14 Verizon…………………….. $3.2 bil
15 Cisco Systems………….... $3.1 bil
16 General Motors………….. $3.1 bil
17 Chevron………………….... $3.0 bil
18 Procter and Gamble……. $2.7 bil
19 Oracle……………………..... $2.7 bil
20 Edison Intl (Cal)…………. $2.4 bil
21 Comcast………………….... $2.2 bil
22 JNJ…………………………... $2.2 bil
23 Time Warner……………... $2.2 bil
24 PepsiCo…………………..... $2.1 bil
25 News Corp……………….... $2.1 bil
26 Hewlett Packard……….... $2.0 bil
27 Fannie Mae………………... $2.0 bil
28 Dell………………………...... $1.9 bil
29 Ford………………………..... $1.9 bil
30 Boeing…………………….... $1.7 bil
31 Nortel Networks………... $1.7 bil
32 Abbott Labs…………….... $1.5 bil
33 Exelon…………………….... $1.5 bil
34 Goldman Sachs………. $1.5 bil
35 WalMart………………….... $1.3 bil
36 Apple……………………..... $1.3 bil
37 Amgen…………………...... $1.2 bil
38 American Express……... $1.2 bil
39 Conoco Phillips……….... $1.2 bil
40 Eli Lilly………………….... $1.2 bil
41 Johnson Controls……... $1.1 bil
42 First Third Bank………... $1.1 bil
43 Kraft……………………...... $1.0 bil
44 Schlumberger…………... $1.0 bil
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In reviewing the above list, I’ll make two very brief observations.
First, wow, look at all the financial companies located at the top of this list. Paul Volcker and Maria Cantwell are right on target in trying to rein in Wall Street. I think the one, at least, somewhat bright spot here is Goldman Sachs. Check out its income tax aggressiveness number here versus that of the rest of Big Wall Street Financial.
So the financial foundation of Big Wall Street Financial includes as one key ingredient the following financial firms disclosing that this is what they owe mostly the US Government upon IRS audit, but only assuming the IRS auditors can find it? These companies have to understand that the IRS is working for the US Government, and thus for US Citizens, who are the ones being financially harmed here. The US Citizens are shouting out that their money here is needed for wise investing in real, sustainable private sector Jobs, rather than invested by Big Wall Street Financial firms in risky financial strategies:
Wells Fargo………..$9.1 bil
JP Morgan Chase…$8.2 bil
Bank of America….$5.9 bil
Citigroup…………...$4.1 bil
AIG…………………...$3.8 bil
Morgan Stanley…..$3.7 bil
When there is this much carryover questionable financial sludge built up in one industry over many years, I think it might be time for a US Federal Government Infrastructure Bank.
Second, look at all the large multinational corps on the list. Given the International Tax Catch 22 many of these multinational corps are in here related to their income shifting and also given the deep crater the US economy continues to be in, I think that it might be wise for the US government to consider temporarily, on a one-time basis, permitting all multinational corps to repatriate at least a good chunk of their unremitted foreign earnings existing as of Dec 31, 2009, with a compromise dividend received deduction of say perhaps 40%, from now until Dec 31, 2010.
These multinational corps can’t pay the IRS what they owe them when they are audited, if their money is locked up in international tax havens like Ireland.
The past Administration left the current Adminstration with a country in a gigantic economic crater. But when the current Administration’s most, or perhaps second most, effective economic initiative so far is the "Pay Fors" program, which includes the highly successful implementation of a mandatory CBO scoring system, which is religiously followed and analyzed by all interested parties, it is no wonder that the country has only climbed about 10% out of this still very deep economic crater.
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Here is my specific proposal on spending some of the excess funds on High Speed Mass Transit Systems. To offset this high build out cost some, I think I would include in the proposal here some funding of the build out cost by all customers, including businesses, to be charged a bit of a System cost build out federal fee as a separately stated portion of the total ticket charge each time they use a High Speed Mass Transit Systems. Since customers, including businesses, will love using these systems, it is only fair that they pay for a substantial part of the build out cost. If you design this customer fee portion of the build out cost program on the front end, you'll get the positive CBO scoring for it. And frankly, I'd set this customer fee at a fairly high percentage of the total estimated build out cost of the High Speed Mass Transit System.
I would then consider allocating some of the excess funds on a fair-minded, logical, objectively ranked basis as down payments on some of the following long-term job-creating, economy juicing, energy independence abetting, upper education enhancing, and both medical treatment and scientific research facilitating, worker productivity improving, and yeah, even quality of life enriching (particularly applicable to retirees in places like Florida, Southern California and South Carolina) High-Speed Mass Transit Systems all over the country, again assuming that CBO can objectively confirm that the resultant job creation is worth its cost. Some of these systems are already partially built and thus the incremental cost to complete them won’t be nearly as substantial as ones where you are starting from scratch:
…From San Diego to Long Beach to Anaheim to Riverside to Claremont to San Bernardino to Las Vegas
…From USC and UCLA and Hollywood in LA to Caltech in Pasadena to the Jet Propulsion Lab to Santa Barbara to Monterey to San Jose to Silicon Valley to Stanford to San Fran to Oakland to U Cal: Berkeley to Sacramento
…From Redmond, WA to Bellevue to U WA: Seattle to Tacoma to Olympia to Vancouver to Portland, OR to Salem, OR to OR State U: Corvallis to U OR: Eugene
…From Cleveland Clinic to Toledo to Notre Dame: South Bend to Gary to Chicago
…From Ft. Wayne, IN to Detroit to U of Mich: Ann Arbor to Flint, MI to Mich ST: East Lansing to Grand Rapids, MI
…From New Orleans to LSU: Baton Rouge to Shreveport, LA to Jackson, MS to U of AL: Tuscaloosa to Birmingham to U of MS: Oxford to Memphis to St. Louis to Chicago to Milwaukee to U WI: Madison
…Indianapolis Spokes to all of Purdue: West Lafayette and on to Gary and Chicago; to Notre Dame: South Bend; to Ft. Wayne; to Columbus, OH; to Louisville, KY; to Evansville, IN; to St. Louis, MO; and to U of IL: Champaign-Urbana and on to Chicago
…Columbus, OH Spokes to all of Cleveland and on to Akron and Pittsburgh; to Wheeling, WV and on to Morgantown, WV; to Dayton and on to Cincy; and to Indianapolis, IN
…Nashville, TN Spokes to Louisville and on to Lexington, KY; to Knoxville; to Chattanooga and on to Atlanta; to Huntsville, AL and on to Birmingham; to Memphis; to Clarksville, TN and on to Evansville, IN and St. Louis, MO
…Atlanta Spokes to Chattanooga and on to Nashville; to Greenville, SC and on to Spartanburg, SC and to Charlotte, NC; to U of GA: Athens; to Augusta, GA and on to Columbia, SC; to Macon, GA and on to Savannah; to Macon, GA and on to Orlando, FL; to Columbus, GA and on to Montgomery, AL; to Birmingham
…Orlando, FL Spokes to U FL: Gainesville; to Daytona Beach and on to Jacksonville,FL and to Savannah, GA; to Jacksonville, FL direct; to JFK Space Center and on to Port St. Lucie and further to Ft. Lauderdale and Miami; to Miami direct; to Naples and on to Cape Coral, St. Pete and Tampa; to Tampa direct
…From St. Louis, MO to Springfield, IL to IL State U: Normal to Peoria to Quad Cities, IL/IA to U of Iowa: Iowa City to Cedar Rapids to Northern IL U: DeKalb to Rockford to Chicago
…From Houston to San Antonio to U TX: Austin to Dallas to Little Rock to U ARK at Fayetteville to Bentonville to Branson to U of MO: Columbia to Kansas City to U of KS: Lawrence to U Neb: Lincoln to Omaha to Des Moines to Mayo Clinic in Rochester, MN to Minneapolis/St. Paul
…From Myrtle Beach, SC to Charleston, SC to Columbia, SC to Atlanta to Chattanooga to U TN: Knoxville to Nashville to Louisville to Lexington, KY to Huntington, WV to Charleston, WV
…From Miami to Ft. Lauderdale to Naples to Ft. Myers to St. Pete to Tampa to Orlando to U FL: Gainesville to Jacksonville to both Tallahassee and to Savannah, GA and on to Charleston, SC and Myrtle Beach SC
…From Myrtle Beach, SC to Charlotte to Winston-Salem to Greensboro to Duke: Durham to UNC: Chapel Hill to Raleigh to Virginia Beach to Norfolk to Richmond to DC Metro Area
…From DC Metro Area to Baltimore to U of MD: College Park to Wilmington to Philly to Atlantic City to Trenton to Princeton to Newark to NY City Metro Area
…From NY City Metro Area to Yale: New Haven, CT to Providence, RI, to Boston, to MIT and Harvard: Cambridge, to Nashua, NH to Manchester, NH to Portland, ME
…Boston, MA Spokes to Lowell, MA and on to Nashua, NH and Manchester, NH; to Portland, ME; to Providence, RI; to Worcester, MA and on to Springfield, MA; to Worcester, MA and on to Hartford, CT; to Cambridge (MIT and Harvard)
…From Yale: New Haven, CT, to Hartford, CT, to U CT: Storrs, to Springfield, MA to U Mass: Amherst, to Albany, NY to U of Syracuse, NY to Cornell U: Ithaca, NY to Rochester, NY to Buffalo, NY
…From Fort Collins, CO to U CO: Boulder to Denver to Colorado Springs
…From U of AZ: Tucson to AZ State U: Tempe to Phoenix
…From Wichita, KS to Oklahoma City, OK to both U of OK: Norman and to Tulsa, OK to Dallas/Ft. Worth
…From Los Alamos, NM to Santa Fe, NM to Albuquerque, NM to U of NM: Las Cruces to El Paso, TX
