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Teri Bernstein, MBA, CPA has been teaching full time in the Business Department of Santa Monica College since 1985.  Prior to that, she worked in Internal Audit and Special Financial Projects for the 1984 Los Angeles Olympics, CBS, Inc., and Coopers & Lybrand (which is now part of PricewaterhouseCoopers).  She attended the University of Michigan and Wayne State University.


Have a lot of followers? ZAP: In Russia, you're now a regulated media outlet

05-07-2014 11:11 PM


cartoon from The Moscow Times article (in translation)

Censorship is alive and well in Russia.  Putin just signed a law that requires bloggers with more than 3,000 daily readers to register with the government as a "media outlet". But the bloggers are caught between Scylla and Charibdis. The law means that they have to abide by the same requirements legally to substantiate what they are saying on their blogs.  However, because they are not "journalists," they are not allowed to make the official inquiries that could actually grant them the resources to provide the required documentation.

Bloggers are stuck--not being able to write about the issues and situations that they find egregious if they cannot document them fully.

Putin viewed the internet as a "special CIA project" in justifying this law. And he is not alone in tightening censorship of the internet. Crackdowns in China, Turkey, Venezuela and Pakistan have also occurred recently. 

Even in the United States, the recent controversy over "net neutrality" and broadband access has implications for free speech and censorship. The internet is a powerful platform for the dissemination of ideas...and where there is power, there is often a fight for control.

Source:  "Russia Quietly Tightens Reins on Web With ‘Bloggers Law’," by Neil MacFarquhar, the New York Times, May 6, 2014.

Follow up:

  • What does "between Scylla and Charybdis" mean? What is another idiom that means the same thing? What other reference (from the article" refers to the same predicament? Why do you think there are so many cultural references to this situation?
  • Think about the blogs that you read.  What would be the pros and cons of these requirements being placed on the blogs with which you are familiar? Give specific examples.

 

Posted by teri.bernstein

Berkshire Hathaway: TRUST is everything...no matter what others say

05-07-2014 11:10 PM

[View:http://community.cengage.com/GECResource/themes/gew/utility/
:550:0]
video from WSJ: Woodstock for Capitalists

Charlie Munger, vice chairperson of Berkshire Hathaway,was at "Woodstock for Capitalists" recently. Munger is a long-time friend of Warren Buffet. Munger's take-away quote: “By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as weakness.”

The statement was a response to the overwhelming trend in businesses and educational institutions to "lawyer up." In addition, businesses are now spending millions on consultants that specialize in (minimum-possible) compliance with regulations. Munger's point was that a better use of business energy is to hire those you trust...and to skip creating an environment of distrust and policing.

The
Rock Center for Corporate Governance (Stanford University) is studying Munger's thesis with respect to its validity and efficacy as corporate policy.

Source:  "Berkshire Hathaway Promotes Trust," by Andrew Ross Sorkin, the New York Times, May 5, 2014.

Follow up:

  • How much does Berkshire Hathaway spend on corporate counsel?  Why is this unusual, and what other policy is unusual with respect to other corporations' behavior? Could it constitute "negligence," as suggested in this article?
  • Munger has said (regarding the policy in Roman times), "If you build a bridge, you stood under the arch when the scaffolding was removed.”  What do you think this means, in terms of being a metaphor for modern corporate behavior?
  • In what other (major) ways is trust important to business transactions?

Posted by teri.bernstein

Dealflicks: selling seats nobody wants is a valuable business

05-07-2014 11:07 PM


image from wefunder.com

Dealflicks is like Priceline: it tries to match moviegoers with seats that are not otherwise going to be used --and offers big discounts.  According to Sean Wycliffe, CEO of Dealflicks, the statistics show that 88% of movie theater seats go empty. This is a marketing niche that was crying to be filled!

Entrepreneur Kevin Hong teamed up with Wycliff and website whiz Zachary Cancio to start the business with venture capital funding. Wong and his sales teams have traveled the U.S. in their minivan trying to woo theaters across America into signing up with their service.


image from article linked below

Dealflicks is very flexible--letting the theaters set prices and determine which shows get discounted. Moviegoers access the deals via phone apps or the Dealflicks website. Dealflicks makes its money by taking 10% to 20% of the ticket price. Last year, sales were $245,000...but they are projected to be more than $2 million this year.

Source:  "Dealflicks aims to put movie fans in cheaper seats," by Richard Verrier, the Los Angeles Times, May 6, 2014.

Follow up:

  • According to the article, when do discounted tickets really work for the theater owners? What are the downsides?
  • Who funded Dealflicks? What was their motivation?
  • Why does Wong make sales calls by minivan rather than by phone?

Posted by teri.bernstein

Millennials trash privacy rights...and so do those controlling "big data"

05-07-2014 11:06 PM

 


from blog.insideview.com

"Your personal information is yours."

According to the LA Times, "A new report, written by a group led by White House counselor John Podesta, says that big data — the various entities that benefit from knowing all there is to know about you — is growing out of control."

What does this mean? It means that sensors are everywhere:

  • in our homes
  • on city streets
  • on wearable devices
  • embedded in credit cards
  • on our computers
  • on our phones
  • in our doctors' offices
  • with our insurance companies
  • at our places of business

Business and government agencies are not going to be restrained from using this data if only "voluntary codes of conduct" are in place. Regulations and audited compliance will be the only things that protect us. "Consumer data" is personal data. NSA monitoring and widespread (but withheld) knowledge of the Heartbleed Virus means that businesses are not acknowledging personal rights.

The business perspective might be: WE NEED this data to efficiently MARKET to our target demographics. But if Verizon is selling to third parties information about websites you are visiting and purchases you are making online, shouldn't you have a say?  Or at least get a financial piece of the action?

"We are concerned," says Jeff Chester, executive director of the Center for Digital Democracy, "that the principle is collect first and worry about privacy and consumer protection later."

Maybe we should take the lead from Europe, where they set the line of scrimmage with this principle:  "all people have a right to privacy."  In U.S. law that right is only implied.  Moreover, the EU has taken the following step:

"In response to the NSA spying revelations, the European Parliament passed even stricter privacy rules in March. They still have to be approved by the European Union's 28 member countries, but represent the region's commitment to individual rights. The new rules wouldn't just give people more control over who can obtain their personal info but also grant a right to have online data erased — a so-called right to be forgotten."

Wouldn't that be a right we could appreciate.

Source:  "Ownership of personal data still appears up for grabs," by David Lazarus, the Los Angeles Times, May 6, 2014.

Follow up:

  • Do you read the privacy disclosures before you agree to them? Why or why not?
  • Reminder: have you changed your passwords in response to the Heartbleed virus?  Remember: the passwords you have "out there" may be a ticking time-bomb.
  • Would you value the European protections with respect to privacy? Would you like to be able to have your online data erased?
  • Why do businesses support the loss of personal privacy? What are the pros and cons of this from a business perspective?

Posted by teri.bernstein

Lying with statistics: how to read the labor graphs

05-04-2014 12:16 AM

Note: You can't really play the video, it is a screenshot [due to an embed FAIL].
The Video is linked at NYT

On the first Friday of the month, the labor report comes out. The airwaves, business print, and internet sites are full of conclusions and spin. But what does it all mean? In fact, the statistics--and the way they are presented--can be very misleading. The "margin of error" in the reports could mean that EITHER one of the following two graphs would be accurate, based on the exact same set of data:

OR..using the SAME data, the jobs report could look like this!

What is the difference? The statistical swing is partly the result of the unknowns and seasonal fluctuations.  Is the job increase or decrease the result of holiday hirings or layoffs? Are people slow to start looking for work again? Or... has there been a sampling error in the data presented? [Note: the sampling error of a few hundred thousand jobs in question is a small percentage of the 130 million jobs in the economy, but the sampling error is extrapolated as though it represents the economy as a whole.]

In addition, one month of data can't really tell you what the trend is.

The problem is: the Labor Report and the analysts who read the report influence stock traders. Traders influence the market...So misleading labor statistics can really skew the real-life results of financial trading based on the labor analysis. Also, the voting public can be influenced by "trends" that don't really have a basis in reality.

One reason for this is that each one of us, as a human being, has a brain that is wired to make sense of whatever data we get...so we are more comfortable coming to a wrong conclusion than we are with hanging out with random, meaningless data.

All we can do is be aware of the problem, and try not to take action on data that we don't really understand.

Sources:  "How Not to be Misled by the Jobs Report," by Neil Irwin and Kevin Quealy, the New York Times, May 2, 2014.

Follow up:

  • According to the article, what conclusions CAN be drawn from the latest Bureau of Labor Statistics Report?

Posted by teri.bernstein

"Giffen goods": Apple bonds violate law of supply and demand

05-04-2014 12:15 AM


image from lightandlife.org

Giffen Goods -- when the rules of supply and demand go awry. When the price goes up, consumers buy MORE instead of less. The name comes from the individual who identified the aberration--a 19th century Scottish statistician/economist named Robert Giffen.

The iconic example of this phenomenon was the consumption of potatoes in Ireland by the poor. When potato prices went down, the peasants could afford to buy meat as well as potatoes...so they consumed fewer potatoes. When potato prices were high, the poor in Ireland could not afford to buy meat, so they had to buy the more expensive (but still cheaper than meat) potatoes--so they bought more potatoes. "Supply and demand" usually predicts that prices decrease when demand is low, and prices increase when demand is high relative to supply.

Here is what happened with Apple:  Last year, they issued $17 billion in bonds. A bond issue in lieu of the issuance of additional stock means that current stock value is not diluted and the the return on stockholders' equity is improved, so this is a popular move with stockholders.

Anyway, when they announced last week that they would be issuing $13 billion in new bonds, the price of the old bonds on the secondary market dipped a little, which would be the expected result according to supply and demand. But when they actually went on sale, the price was HIGHER than it had been before the additional bonds became available. Go figure.

Because bond investors tend to be the same people that invest in packaged mortgage bundles, analysts are looking to that market to make sense of this development. What those analysts are seeing is that mortgage lending is getting "looser" again, so the bundled mortgages are becoming more risky. 

This pushes the return rate higher. So...lower quality or longer term investments (Apple's bonds are 30 year) become more appealing to investors.

One analyst,
Martin Fridson, writing for S&P Capital IQ LCD, predicted that these low-quality investments will begin pushing up the default rate in 2016--and the defaults will continue until 2020. “During that period, we project that on a global basis, approximately 700 bond issuers and 1,150 debt issuers in total will default. The face amount of bonds and loans going into default should approximate $1.5 trillion, with the U.S. accounting for $1 trillion of the total.”

This doesn't say anything about what will happen specifically with the Apple bonds, but since Apple's solvency and liquidity is very good, this dire prediction is unlikely to affect the Apple bondholders.

Source:  "Searching for Yield, At Almost Any Price," by Floyd Norris, the New York Times, May 2, 2014.

Follow up:

  • Look up the bond issue on the internet. What is the interest rate being paid on the old bonds?  What is the interest rate on the new bonds? Can you think of any financial reason--market driven--for the popularity of these bonds? Hint: check out the rate your local banks are paying on their Certificates of Deposit.
  • If you bought Apple's bonds last year, and sold them this week, the author of the NYT article notes that you would experience a net loss. Why is this?

Posted by teri.bernstein

Two Giant Banks Face Criminal Charges

04-30-2014 11:43 PM


image of banks in Paris and Zurich by Jacques Brinon/Associated Press and Arnd Wiegmann/Reuters

Two banks are under criminal investigation by the U.S. Federal government. What is interesting is this: neither of the banks are American banks. Being investigated are the BNP Paribas Bank in Paris and Credit Suisse Bank in Zurich.
The crimes under investigation are:

  • Credit Suisse: offering tax shelters to Americans
  • BNP Paribas: doing business with countries such as Sudan, which is now blacklisted by the U.S.

Facing criminal charges could mean revoking the banks' charters to operate in the U.S., which would mean they couldn't do business. Article authors refer to this as analogous to the death penalty. But since Federal guidelines require analyzing the effect this would have on the business before the penalty is enacted, it is unlikely that the full penalty would be applied. This requirement continues to be invoked throughout discussions of wrongdoing.

So...what does "facing criminal charges" really mean?  The penalty being considered is "temporarily suspending the bank’s ability to transfer money through New York branches on behalf of foreign clients, a move that could undercut the bank’s revenue."  Hmm. That doesn't seem very harsh.  In the BNP Paribas case, fines might also be incurred.

It sounds like a cost of doing business...business-as-usual, that is. Their actions seem to be "above the law."

Sources:  "Two Giant Banks, Seen as Immune, Become Targets," by Ben Protess and Jessica Silver-Greenberg, the New York Times, April 29, 2014.

Follow up:

  • What does "above the law" mean?
  • What are the hurdles involved in prosecuting these cases?
  • What are the banks really trying to avoid in these cases?

Posted by teri.bernstein

48,000 Adidas and Nike workers on strike in China

04-29-2014 12:53 AM


image from the Associated Press via the Epoch Times; linked below

"48,000 workers at the Chinese shoe supplier to Nike and Adidas, Yue Yuen (part of the Pou Chen Group), have been striking since 14 April. Workers went on strike to demand that the company repay years of stolen social insurance payments, implement a significant wage increase, and sign legal labour contracts (having found that the company had been making them sign fake work contracts for nearly 20 years). The company had responded by offering a measly wage increase and cost of living payment that the workers rejected. The sheer scale and longevity of the action represents an historic turn in the formation of global capitalism. There are a number of reasons why this strike is terrifying not only for the supplier factory bosses in China but also for transnational capitalism."

The above, slightly alarming report from http://wire.novaramedia.com/ first came to my attention while I was perusing the blog site The Daily Kos. Since the strike was large, since the strike involved American and European companies, and since the strike had been on-going on for almost two weeks, I was surprised that it wasn't being reported elsewhere.

The Associated Press (AP) did report that about 75% of the striking workers returned to the job within the last few days, even though there was no formal agreement with the immediate Chinese employer, the Taiwan-based Yue Yuen Industrial Holdings Ltd. The AP also reported that the return to work had been "assisted by the police," and that it was unclear why the workers had, in fact, returned.

Global labor issues influencing this industry include the shortage of a migrant labor, and increasing labor activism. These and other factors are driving up prices. It remains to be seen how this dispute finally settles out.

Sources:  "Huge Strike in China (and not a word from anyone)," by James Leo, the Daily Kos, April 27, 2014.

"Strike ends Partially at Massive Chinese Shoe Factory That Produces for Adidas, Nike, New Balance," by the Associated Press, published by the Epoch Times, April 26, 2014.  Follow us: @EpochTimes on Twitter | epochtimes on Facebook

Follow up:

  • Why do you think a huge labor strike like this is not getting major media attention on CNN, MSNBC, FoxNews and in the major newspapers (New York Times, Wall Street Journal)?
  • What are the major issues involved in this strike? Do you think they have been resolved? Why or why not?

Posted by teri.bernstein

Accounting skills linked to moral high ground

04-28-2014 11:28 PM


image by Javier Jaén from the article linked below

 

Americans don't understand much about accounting and finance. Jacob Soll, a professor of history and accounting at the University of Southern California, thinks that this lack of cultural literacy in accounting may be partially responsible for the unfettered lack of morality and self control exhibited by financial institutions in modern life.

He makes the point that when accounting skills were pervasive in society, people viewed keeping things in balance as a moral prerogative as well. In the heyday of the Dutch East India Company and the Medici financiers in Italy, portraits of businessmen were painted with the individuals actually doing accounting, or with their books of account in prominent display.

The basis essence of double-entry accounting is fairness and equality in each business transaction. Debits = Credits. According to Soll, as a society we have left the understanding of these accounting basics concept to "specialists and computerized banking." He suggests, "If we want stable, sustainable capitalism, a good place to start would be to make double-entry accounting and basic finance part of the curriculum in high school, as they were in Renaissance Florence and Amsterdam."

It can't hurt.

Source:  "No Accounting Skills? No Moral Reckoning," by Jacob Soll, New York Times opinionator, April 27, 2014.

Follow up:

  • Do you want to get started on your accounting literacy? Check out this link from the Accounting Coach. Summarize what you learned.
  • What is the historical significance of the Dutch East India Company?

Posted by teri.bernstein

#backlash: a lession in social media for the NYPD

04-23-2014 11:59 PM

J
images from article linked below

The New York Police Department had a Good Idea: set up a Twitter site, #myNYPD,  so that people could tweet their smiling selfies with heroic police officers, and other happy pictures.

Things did not go well. Instead of happy photos good for public relations, they got photos of NYPD officers abusing citizens in various ways. Oops.

Marketing experts don't seem to be surprised by the nasty tweets. McDonald's had run into the same problem. Said Ann Handley, co-author of Content Rules, "You can't get people to talk about how great you are on Twitter.” 

Source:  "The NYPD learns about #backlash" by Dan Bobkoff, Marketplace American Public Media, April 23, 2014.

Follow up:

  • What is the "law of unintended consequences"?
  • How might the NYPD avoided this social media debacle?  Are such problems part of what is to be expected in the fast-moving social media-sphere?

Posted by teri.bernstein

What "the 1% don't want you to know": Paul Krugman on Thomas Piketty

04-22-2014 1:51 AM


image is from an interview at BillMoyers.com, via VIMEO

According to Paul Krugman's analysis of newly observed changes in the structure of the U.S. economy, if you are not part of a family in which you will get a piece of inherited wealth--you and your own heirs are doomed. Not only will you never be rich--you and your family will become poorer with each generation...as those with inherited family wealth become richer. 

The focal point of the interview linked above between Bill Moyers and Paul Krugman is the new book by Thomas Piketty of the Paris School of Economics: Capital in the Twenty-First Century. In the book Piketty delineates how 67% of the increase in the top-heavy distribution of wealth that has occurred since the 1970's is the result of huge raises given to corporate executives. These huge salaries, combined with tax and other governmental policies in the U.S., have created the perfect storm for the formation of an oligarchical economic structure that has now become hard-wired and institutionalized.

Krugman makes the additional point that wealth is now so concentrated that it is invisible to most of the public--the shear size of the fortunes are out of the realm of what the average person can understand in terms of wealth management.

The impact of this wealth concentration on middle and lower income people in the United States is much more pronounced than it is in Europe because governmental policies in Europe create a higher standard of living for the poorest 20% by providing health care, higher minimum wage and other income and social service support.


book image from amazon.com

Krugman experienced reading Piketty's book as as "Eureka!" moment, as it showed how radically the economic structure had changed when analyzed over the long term. The book also pointed out that once wealth is held in the hands of the oligarchical few, it becomes nearly impossible to change the laws to tax the wealthy at a greater rate. The concentrated wealth has gained control over public policy as well.

Can the situation be changed--to favor real competition and the growth of small businesses and the middle class? I'm going to read the book to find out...

 

Source:  "Bill Moyers w/Paul Krugman: “What the 1% Don't Want You to Know" by bobswern, the Daily Kos, April 18, 2014.

Follow up:

  • According to Paul Krugman, what forces might counter the oligarchical situation which we now find ourselves in? [this is about 18 minutes into the interview]
  • What is the "high r, low g" economy that Krugman refers to?
  • According to Bill Moyers and tax analysts, how many times greater are top management salaries more than low income workers, based on recent tax data?

Posted by teri.bernstein

Researchers find USA is no longer a democracy; what does this mean for middle income business people?

04-19-2014 12:13 AM


image from globalresearch.ca

Many of us educated in the United States grew up thinking that "democracy" and "free markets" went hand-in-hand, and that both were "as American as apple pie." But a newly published research study, Testing Theories of American Politics: Elites, Interest Groups and Average Citizens, by Martin Gilens of Princeton and Benjamin I. Page of Northwestern University, makes the case that the U.S.A. is no longer a democracy.

Their findings, in a nutshell: "Comparing the preferences of the average American at the 50th percentile of income to what those Americans at the 90th percentile preferred, as well as the opinions of major lobbying or business groups, the researchers found out that the government followed the directives set forth by the latter two much more often." In other words, these groups have influence over public policy, regulation and law-making:

  • Americans with income of 90% and above
  • major lobbying groups
  • major business groups

In fact, Gilens and Page found that, "the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy."

If there are few major employers, or power is concentrated in the hands of the few, what is the mechanism for paying adequate wages and salaries to workers and middle managers? There is no incentive to pay fair salaries if the number of employment options has diminished, and the regulatory bodies are controlled by the companies that are supposed to be regulated.

There are an increasing number of op-ed pieces, research papers, and books addressing the issues of income inequality and the diminished existence of truly free markets. Both have affected the economy and business practices in the United States.

Sources:  "Princeton Concludes What Kind of Government America Really Has, and It's Not a Democracy," by Tom McKay, PolicyMic,  April 16, 2014, citing an article to be published this fall in Perspectives on Politics.

Follow up:

  • Do an internet search for "oligarchy" AND "free markets". Summarize the results of your search.
  • According to the article by Tom McKay (or the research paper itself), what are some specific implications of Gilens' and Page's findings for middle-class business people?
  • Play the devil's advocate: why is an oligarchy good for American business?

Posted by teri.bernstein

One really good bank for small businesses; Where is YOUR money?

04-17-2014 10:48 PM


image from www.cleveland.com

What makes a bank a "good bank" from the standpoint of supporting business growth and providing excellent service to customers?  According to Steve Steinour, chairman and CEO of Huntington Bank:

"Small businesses are the foundation of our Main Street economies throughout the United States. These businesses generate two-thirds of all of new jobs and help keep our neighborhoods healthy. Huntington is committed to supporting small-business growth as a key way to strengthen our communities as they continue through the economic recovery."

Huntington Bank--a regional bank in Ohio--is the 33rd largest bank in the U.S. and has branches in Ohio, Michigan, Pennsylvania, Indiana, West Virginia and Kentucky. Nevertheless, Huntington Bank will probably be the number one small-business lender in the United States this year. For the first six months of federal fiscal year 2014 (which ends June 30, 2014), Huntington has the largest number of SBA loans.

The classic business model for a traditional bank (as opposed to an investment bank) is to take depositors money, on which one interest rate is paid, and loan it out to regional businesses at a higher rate, thereby generating a profit. Investing in local businesses is the way to build strong business communities.

On a side note, first quarter profits were down for Huntington, so a buy-back of shares is planned to help investor returns. First-quarter profits were $149 million, a declined of $4 million from a year ago. Per share, profits were unchanged at 17 cents.

Sources:  "Huntington Bank on track to become nation's largest small-business lender, but profits dip in first quarter," by Teresa Dixon Murray, the Plain Dealer, April 16, 2014.

Follow up:

  • What does "pent up demand" mean? Give another arena where this phenomenon has been observed.
  • Where is YOUR money?  In a mega-bank like Bank of American or Wells Fargo? Or in a bank with high numbers of small business loans?
  • Watch the film "It's a Wonderful Life." How does the Savings and Loan depicted in that film exhibit the characteristics of a bank that is important to small businesses?
  • How does buying back shares help the returns for the bank's investors (as opposed to the banks depositors or creditors)?

Posted by teri.bernstein

Offshore tax havens mean higher taxes for individuals

04-16-2014 2:59 PM

The graphic above illustrates how much in additional taxes is paid by each person by state, due to corporate and wealthy individuals' use of offshore tax havens.  I live in California...and I'd love to have my state tax bill reduced by $1,783.

What is an "offshore tax haven" exactly? These are banks in other countries, such as Switzerland and several island nations, with low tax rates and laws that provide secrecy regarding financial transactions. Corporations and wealthy individuals--even though they are required under penalty of perjury to report all income on the U.S. tax returns regardless of where it was earned--can sometimes hide illegally obtained income and the earnings on that income in such banks. Jordan Belfort, the "Wolf of Wall Street," was imprisoned partly due to his illegal use of a Swiss tax haven.

Some states, such as Montana and Oregon, have taken steps to close the tax haven loophole by applying the same kind of taxation formula used for companies who do businesses in several states. The report, by the U.S Public Interest Research Group, "Closing the Billion Dollar Loophole" provides a roadmap for how this is done and what it can accomplish.

In addition to tax revenues lost by states, the federal government has losses as well. The Congressional Research Service estimates these to be $90 billion to $100 billion annually. This results in more money out of the pockets of tax-paying individuals.

Perhaps a tax overhaul is needed so that the tax system is perceived as "fair." The businesses would not have to waste creative energy pursuing tax avoidance, and could focus more on positively improving their products and their bottom lines.

Sources:  "How Much Do Offshore Tax Havens Affect You," by the U.S. Public Interest Research Group, via Upworthy, April 15, 2014.

"How states can reclaim $1 billion from offshore tax havens," by Niraj Chokshi, The Washington Post, January 31, 2014.

Follow up:

  • What do you think? What kind of tax rule changes might encourage businesses to "buy-in" to the tax system and increase voluntary compliance with tax law?

Posted by teri.bernstein

From 35% to 12.6%: Corporate tax loopholes lower real tax rate

04-15-2014 7:44 PM


image from blog

OK, April 15th is behind us (Tax Day). Maybe you are pondering what tax planning you might be able to do to better your circumstances with the IRS bill. Maybe you are rationalizing your tax burden by thinking that everyone is in the same boat.

But...corporations are not in the same situation as individuals. Many corporate tax loopholes end up reducing corporate tax burdens so that they are considerably lower than the rates that individual "average Americans" are paying. According to the Government Accountability Office (GAO), the average corporate tax rate was 12.6% in 2010.

Here are some of the juiciest tax loopholes enjoyed by U.S. corporations:

  • The "carried interest" loophole: Private equity and hedge fund operators pay capital gains tax rates (15% to 20%) on what is really their ordinary income (taxed to the rest of us at the maximum rate of 39.6%).
  • This loophole is also enjoyed by the real estate industry because of partnership accounting. Investment banking partnerships are 41% "real estate related" so they can take advantage of this favorable taxation as well.
  • Individual taxpayers are not allowed to deduct even a parking ticket--or any fine issued by a government agency. Corporations, on the other hand, can deduct the costs of fines and prosecution expenses for crimes from its tax returns.  So when a company like JPMorgan Chase admits wrongdoing and pays a fine--it costs the rest of us taxpayers money because the big bank gets to deduct the fine and lower their tax bill.
  • Corporate jets maintained for executive travel can be depreciated over 5 or 7 years (faster than airlines are allowed to deduct the planes they use for their main business). These deductions reduce corporate tax bills. Ironically, small businesses using luxury cars are not able to fully deduct those expenses...but the planes are not subject to these "luxury vehicle" limitations.
  • Corporations can deduct as compensation costs the executive stock options given to executives--even though they don't cost the companies any money. According to Citizens for Tax Justice, Amazon used this tax break to reduce their effective tax rate between 2010 and 2012 to 9.4% for federal and state taxes combined.  If they had not taken advantage of this loophole, their effective tax rate would have been 40.4% for the combined federal and state taxes.

Source:  "Looking at Some Corporate Tax Loopholes Ordinary Citizens May Envy," by Andrew Ross Sorkin, New York Times Dealbook, April 14, 2014.

Follow up:

  • What tax loopholes do YOU take advantage of? Do you think these are fair? 
  • What are your thoughts about corporate tax loopholes? Discuss the pros and cons.

Posted by teri.bernstein

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