Monday, April 18, 2011
Following up on yesterday's post, PwC: U.S. Companies Pay World’s 6th-Highest Effective Tax Rate: Edward Kleinbard (USC) criticizes the PricewaterhouseCoopers study:
The PwC study is extraordinarily disingenuous, in at least three dimensions:
- All of the report's numbers are unweighted simple averages. So a company with $20 billion in profits is weighted as heavily as a company with $200 million in profits (or wherever the bottom cutoff is). This vastly overstates the importance of unimportant companies in low tax jurisdictions. Stateless Income discusses this by comparing statutory rates in the top OECD countries to those of a simple average of all OECD countries.
- The report looks at 484 US headquartered companies and 1,336 companies elsewhere in the world. For the USA, that means that it is lumping large amounts of domestic income with foreign income. As a rule of thumb, he further down you go within the population of US firms, the greater the proportion of domestic income, and the fewer resources that are devoted to stateless income planning. So the report is muddling tax on domestic income with tax on foreign income. But again, because the numbers presented are all simple averages, the effective tax rate imposed on US firm # 486 is weighted as heavily as the rate on Firm #1.
- The rate used is a GAAP accounting current tax provision. If companies in Country X have small actual tax payments but large deferred tax liabilities, because of accelerated depreciation for example, then they will be treated the same as companies in Country Y that have LARGER actual tax payments but little by way of timing differences (deferred tax liabilities), because Country Y has lower rates but does not give incentives through accelerated depreciation. And hey, whaddaya know, Country X is the USA! Every country that has lowered corporate tax rates has also broadened its base. The reason this is important is that if a company is growing, deferred tax liabilities attributable to accelerated depreciation never ripen into cash liabilities —new equipment is acquired with new accelerated depreciation benefits, sheltering the 'missing' depreciation from the old equipment for which tax depreciation has run out.I just don't understand why the relatively few thousand dollars that PWC presumably collected for authoring this document justify the erosion of its reputation and goodwill.