IS
THE TIME RIGHT FOR REIT?
Now that those who are punctual have paid their taxes in
an annual ritual of disbelief and disgust—I still owe money? where does it
go?—perhaps it’s time to plan for next year. As Nathaniel Popper reported in The New York Times earlier this week,
corporate America is not only planning, but plotting to evade federal taxes
altogether.
What may seem a novel idea is actually
practiced by many mom-and-pop operations that set themselves up as Limited
Liability Companies and though different are treated by the IRS as S Corporation which allows such entities “with 100 shareholders or less the benefit of
incorporation while being taxed as a partnership. This means that any profits
earned by the corporation are not taxed at the corporate level, but rather at
the level of the shareholders.”
Assume we have a company whose profits are $100,000. The company
pays 35% in corporate taxes ($35,000), and after that dividends are distributed
to shareholders some of whom might pay as much as 39.6% marginal rate, for potentially
a total tax rate of 74.6% ($74,600). If the company is no longer a C corporation,
its profits flow to individual shareholders who then pay taxes only at their
own marginal rate—saving the 35% bite up front—and avoiding double taxation.
This has been known for years, and shouldn’t raise any
controversy. Many small businesses set themselves up in such a way, whether or
not owned by one family or few investors. What has raised some eyebrows in this
season of congressional debates over taxes and budgets is whether or not what’s
right for small LLCs (with as few members as one and as many as one hundred)
should be right for large corporations (with thousands of shareholders,
including large pension funds).
The legal and tax designation of a Real Estate Investment Trust–REIT—was
set up already in President Eisenhower’s days. Its main purpose, as distinct
from other businesses, was to recognize that since their holdings were
exclusively real estate, these trusts represented passive investment that
should be treated differently by the tax code. As Popper suggests, over one thousand
companies have slowly converted their tax status, with IRS approval, to be
taxed as REITs. Is it right?
On the one extreme of the spectrum are those who say,
absolutely! If you are not violating the law, if you are approved by the IRS
(which is vigilant about one’s status), then by all means minimize your tax
burden as much as possible. As long as your actions are legal, they are ipso
facto moral as well!
One may challenge this answer, and ask: but aren’t the overall
taxes collected less than if the entity stayed a C corporation, and if so, wouldn’t
this undermine government activities, such as national defense? Shouldn’t overall national concerns override individual
temptation to reduce one’s tax liability?
On the other extreme of the spectrum are those who claim that though
legal, the REIT move is unfair. Why benefit only a select few corporations? Moreover,
if REIT-designation is available, eventually no corporation would ever pay
corporate taxes. Either way, this unequal treatment, though legal, is immoral.
This discussion may be academic: 83 out of the 100 largest
publicly-traded companies game the tax code to the tune of $150 billion
annually, according to some estimates. Forbes
reported that 26 companies paid their CEOs more than they paid in federal taxes
in 2012. Obviously this is legal. But isn’t it time to revisit the very notion
of corporate taxes? Do corporate taxes make the US less competitive? ABC reported in 2007 that Halliburton
(the one that got billions of dollars in contracts during the Iraq war) was
moving its corporate headquarters from Houston to Dubai in the United Arab
Emirates. Dare we ask why?
Perhaps we are asking the wrong questions, and instead of
worrying about the REIT tax loophole, we should ask about overall tax reform. Oh,
if only tax policy were discussed in logical and moral terms, what a wonderful
world we’d have!
Raphael
Sassower is professor of philosophy at UCCS. He can be reached at rsassower@gmail.com See
previous articles at sassower.blogspot.com
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