Wednesday, August 20, 2008

Oops

According to a New York Times Story:

"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."

According to a Reuters story on the same report:

"The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005."

There is a huge difference between the two claims. It isn't in the least surprising that a majority of corporations had at least one year during the period with no taxable income. It would be quite surprising if a majority had no taxable income at all throughout the period, which is what the Times is claiming. I would give high odds that it's the Times, not Reuters, that is wildly misstating the facts.

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[Later Addition]

One of the comments to this post gives the URL of the GAO study in question. It looks as though both Reuters and the Times misread the report, but in different ways. The Reuters story is clearly based on:

"As figure 2 shows, about 72 percent of FCDCs and 55 percent of USCCs reported no tax liability for at least 1 year during the 8 years. About 57 percent of FCDCs and 42 percent of USCCs reported no tax liability in multiple years—2 or more years—and about 34 percent of FCDCs and 24 percent of USCCs reported no tax liability for at least half the study period—4 or more years."

While the text doesn't say so, the figure's label makes it clear that it is showing large corporations not, as Reuters implied, all corporations. I made the same mistake in an earlier version of this addition, and was corrected by a poster in the comments thread.

I could find nothing in the report that corresponded precisely to the claim in the Times story. One possibility is that they were using the same figures as Reuters, combining the numbers for the two kinds of corporations, and misreading one year in eight as eight years in eight. Alternatively, they might have been misreading the first graph in the report which showed, not the percentage of firms that reported no tax liability in any of the years 1998-2005 but, for each of those years, the percentage that reported no tax liability in that year.

Perhaps the author intended to write, not "Two out of every three United States corporations paid no federal income taxes from 1998 through 2005" but "In each of the years 1998 through 2005, two out of every three United States corporations paid no federal income taxes," which is at least roughly true, sounds very similar, but is in fact very different.

12 Comments:

At 9:47 PM, August 20, 2008, Blogger Seth said...

What percentage of corporations are Subchapter-S (which don't pay taxes because their income is passed through to their owners)?

 
At 3:32 AM, August 21, 2008, Blogger Joe said...

To be fair to the NYT, their headline says "Study Tallies Corporations Not Paying Income Tax" whereas Reuters' says "Study says most corporations pay no U.S. income taxes." Since many people may only read headlines, it is more likely they'll get the worst impression from Reuters.

 
At 9:43 AM, August 21, 2008, Anonymous Anonymous said...

"There is a huge difference between the two claims."

The two claims are not mutually exclusive.

"It would be quite surprising if a majority had no taxable income at all throughout the period, which is what the Times is claiming."

Whether it's "quite surprising" to you or not, what the Times is "claiming" here -- that the GAO report says as much -- is correct. But don't take my word for it - here is the GOA report that the Times is reporting on:

http://www.gao.gov/new.items/d08957.pdf

"I would give high odds that it's the Times... that is wildly misstating the facts."

Damn - I should have made a bet with you before demonstrating that you are "wildly" incorrect here.

 
At 10:13 AM, August 21, 2008, Anonymous Anonymous said...

Actually, no corporation ever pays any taxes. Corporations are legal fictions and legal fictions don't pay taxes--people do.

 
At 10:46 AM, August 21, 2008, Blogger David Friedman said...

Anonymous kindly provides a link to the GAO study, which I hadn't found. But I am a little puzzled as to why he thinks it supports the NYT report. To quote:

"As figure 2 shows, about 72 percent of FCDCs and 55 percent of USCCs reported no tax liability for at least 1 year during the 8 years. About 57 percent of FCDCs and 42 percent of USCCs reported no tax liability in multiple years—2 or more years—and about 34 percent of FCDCs and 24 percent of USCCs reported no tax liability for at least half the study period—4 or more years."

How can it be the case that only 34% (Foreign) and 24% (US) reported no tax liability for at least half the period, yet two-thirds reported no tax liability for the whole period?

 
At 2:59 PM, August 21, 2008, Anonymous Anonymous said...

Hi David, I'm the "anonymous" that provided the GAO report link. (Not the other "anonymous" who posted here re:"legal fictions" - that is someone else.)

"As figure 2 shows..."

Figure 2 only refers to large corporations (where "large" is defined as "defined as "with assets of at least $250 million dollars or gross receipts of at least $50 million dollars").

With respect to all corporations, I refer you to Figure 1, where it is quite clear that the New York Times is correct when they say that:

"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"

For that matter, the Reuters article you cited was also correct where it said (headline and first paragraph):

"Study says most corporations pay no U.S. income taxes ... Most U.S. and foreign corporations doing business in the United States avoid paying any federal income taxes, despite trillions of dollars worth of sales, a government study released on Tuesday said."

 
At 4:29 PM, August 21, 2008, Anonymous Anonymous said...

According to the study only 2.7% of large U.S. corporations paid no tax from 1998-2005. Further, 45% paid tax in ALL those years.

The figure for all (including small) corporations isn't given, but it's certainly nowhere close to 66%.

Is it really that difficult to understand the difference between not paying tax in at least one year from 1998-2005 and paying tax in no years from 1998-2005?

 
At 5:15 PM, August 21, 2008, Anonymous Anonymous said...

"The figure for all (including small) corporations isn't given, but it's certainly nowhere close to 66%."

Incorrect.

Figure 1 of the GAO report clearly and unequivocally shows that ~2/3rds of all corporations did not pay income taxes from 1998 through 2005:

http://www.gao.gov/new.items/d08957.pdf

 
At 5:24 PM, August 21, 2008, Anonymous Anonymous said...

I guess that answers my question. Yes, it really is difficult (even impossible) for some people to understand.

 
At 5:37 PM, August 21, 2008, Anonymous Anonymous said...

"One of the comments to this post gives the URL of the GAO study in question. Contrary to what the commenter asserts, Reuters, not the NYT, got it right:

"As figure 2 shows..."


Nope. Again, the NYTimes did get it right.

Again: Figure 2 only refers to LARGE corporations, not ALL corporations.

But don't take my word for it, David - here's the title to Figure 2:

Figure 2: Percentage of Large FCDCs and USCCs That Reported No Tax Liability for Multiple Years between 1998 and 2005"

(emphasis mine)

 
At 7:11 PM, August 21, 2008, Blogger David Friedman said...

"Figure 1 of the GAO report clearly and unequivocally shows that ~2/3rds of all corporations did not pay income taxes from 1998 through 2005:"

That is not correct. If the figure were showing the percentage that paid in none of those years, it wouldn't be a line but a single point.

The figure is showing, for each year, what percentage didn't pay taxes in that year. That's why it is a graph over time.

You are correct, however, that the quote I gave was for large corporations, not for corporations in general. The passage doesn't say so, which is what confused me, but the figure does.

 
At 9:12 PM, August 21, 2008, Anonymous Anonymous said...

ME: "Figure 1 of the GAO report clearly and unequivocally shows that ~2/3rds of all corporations did not pay income taxes from 1998 through 2005:"

DAVID: "That is not correct. If the figure were showing the percentage that paid in none of those years, it wouldn't be a line but a single point."

I think we are having a semantic disagreement at this point - what I wrote above, which is a paraphrase of what the New York Times wrote, is indeed correct.

The confusion here is that the wording imprecise -- it can reasonably and fairly be interpreted in two ways. One interpretation - which is the interpretation that I meant to convey - is that *each year* from 1998 through 2005 ~2/3rds of all corporations did not pay income taxes. And again that is correct, as Figure 1 demonstrates.

The other interpretation - the one you are using - is that is that *over all years combined* from 1998 through 2005 ~2/3rds of all corporations did not pay income taxes.

The New York Times' wording:

"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"

is ambiguous in that way as well, but it too is not incorrect.

 

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