Sunday, August 17, 2008

Business news corrections of the week -- housing, corporate taxes and broccoli

Maybe they should teach a few business courses in journalism school? At least for students who plan to write in the business section of the paper?

From my home town "paper of record":

An article ... on Wednesday about the role of Fannie Mae and Freddie Mac in financing multifamily housing projects misstated the average price that buyers are paying for apartment buildings that are being sold by Archstone, a national apartment company. It is $200,000 per unit, not per square foot. Similarly, Tishman Speyer and Lehman Brothers paid $240,000 per unit, not per square foot, when they bought the company last October.
OK, we know housing prices got a bit high, but $240,000 per square foot? ;-)

Also from the Times, one that has (deservedly) received a good deal of note around the web, from a would-be breathless revelation of mass corporate tax evasion...

Most U.S. Corporations Pay No Income Tax

Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released Tuesday by the Government Accountability Office, the investigative arm of Congress ... The study covers 1.3 million corporations of all sizes, most of them small, with a collective $2.5 trillion in sales .... At a basic corporate tax rate of 35 percent, all the corporations covered in the study in theory owed $875 billion in federal income taxes.
Uh ... no ... not even "in theory". Income taxes are owed not on revenue or sales but on income, which equals revenue minus the cost of earning the revenue, that is, expenses.

The New York Times Co., which has income equal to all of 2.8% of its revenue -- that's called a "profit margin", for its business section writers and editors -- should be familiar with this. Does Pinch Sulzberger really want to pay $1.09 billion of income tax on $88 million of income, even "in theory"?

The Associated Press simultaneously jumped on the same story with its own spin on the "cheatin' big corporations" angle.

About 25 percent of the U.S. corporations not paying corporate taxes were considered large corporations, meaning they had at least $250 million in assets or $50 million in receipts.
After which the Tax Foundation kindly explained to it how long division works...

However, the actual report (Table 1, page 23) reflects that, of the 1.26 million U.S. corporations with no 2005 tax liability, just 3,565 were large. That's 0.28%, or 89 times lower than the AP's figure. Oops!
Well, if not complex things like the price of housing or the corporate income tax, we might think the press could at least get the price of vegetables straight. But from Britian's Guardian:

... some readers have questioned the discrepancy between the picture of a piece of broccoli on page 3 yesterday ("Food and fuel prices send inflation to new high as City fears interest rate increase") apparently showing a price rise of 11%, and that of another piece on page 2 of G2 ("Beat rising food bills - follow the inflation-proof diet"), which showed its price falling by 20%. The first piece of broccoli was there to represent price changes on vegetables overall, as monitored by the Office of National Statistics. The G2 broccoli price change was based on a shopping basket compiled by the Daily Mail -- which in fact indicated a fall in price of 50%, not 20%. [Via RtE]

Ah, well.

I'll add a word about the GAO report that was so badly misreported by the Times and AP stories. Contrary to the impression those stories give, it wasn't at all about tax evasion by US corporations in general, didn't try to measure it and made no claims about it.

The report was about one specific tax issue known as "transfer pricing". This concerns international businesses that set prices on transactions between their affiliates in different nations to move profits across boarders to lower-tax jurisdictions.

For instance, a corporate group's member in foreign Country X makes an item, sells it to a sibling business unit in New Jersey, which then makes some modification to it and sells it to a customer in Hackensack. The profit on the whole transaction is $1,000.

If the corporate tax rate in the US is lower than in Country X, then the corporation in X can sell the item to the affiliate in NJ for a low price taking a profit of say $100 taxable in X, and the NJ corporation can then charge a big mark up to report a $900 profit on the sale to the customer. Total profit, $1,000, of which $900 is in the lower-tax US. But if the US tax rate is the higher one, the group can do the reverse -- have the corporation in X set a price that gives it a $900 profit, while the US sibling charges only a modest $100 markup, so again total profit is $1000, but now $900 of it is in lower-tax X.

This gets complicated for the tax auditor because it is perfectly legitimate for businesses to arrange their operations in light of the tax laws so as to add value to products in low-tax jurisdictions. The question then is whether they shift profits that way, legitimately, or do so only with bogus bookkeeping entries to make it look like they are doing that. And the GAO report doesn't even look at that issue.

Instead, all this GAO paper tries to do is compare the profits of foreign controlled domestic corporations (FCDCs) operating in the US, all of which have the opportunity to engage in transfer pricing, to the profits of all US controlled domestic corporations (USCCs), the vast majority of which do not operate internationally, to see of there is a difference. Presumably, if transfer pricing is a big thing, with a lot of taxable profits being transferred out of the US, then the FCDCs that use it will have lower profits reported in the US than comparable US firms that don't because they don't operate internationally.

The report's finding ...

From 1998 through 2001, a higher percentage of all FCDCs reported no tax liability than all USCCs, but differences after 2001 were not statistically significant.
... boils down to "move along folks, nothing to see here".

But not a word of the study's real purpose or findings was reported by the Times or AP. Instead, the Times and AP journalists seem to have been shocked by its raw data -- news to them! -- on the USCCs, showing that hundreds of thousands of lawn-mowing services and other Mom-and-Pop shops, many now defunct (if they ever got off the ground in the first place) but not formally liquidated after being organized as corporations, paid no income tax in 2005! Not only that, but even corporations as large as General Motors and several big airlines avoided income tax on all their sales! And they breathlessly shared this revelation with the world -- inflaming anti-business types everywhere (read the comments under the linked Times story).

Well, judging by the trend line of its profit margin, The New York Times Co. too may soon join the ranks of those big corporations that pay no income tax at all on their revenue.

And after reporting like this, we'll know why.