The real lucky duckies

February 19, 2003

THE NEXT TIME President Bush launches into a hard sell for his sweeping tax cuts for the well-off, consider how his patrons at Enron treated corporate taxes - as a profit center.

It turns out the nation's top energy company - now its largest bankruptcy - paid no federal income taxes from 1996 through 1999, while reporting profits of more than $2 billion, according to a recently released congressional investigation.

Enron - with ties to several dozen Bush administration officials and one of the president's biggest financial backers - accomplished this sleight of hand via a dozen mystifying but arguably legal tax shelters cooked up by an incestuous cast of highly paid lawyers and accountants.

These complex shelters didn't just enable the company to dodge taxes. They were perpetual cash machines, in that they also generated about 20 percent of Enron's profits, if only on paper. The company's tax department actually had revenue targets, which these schemes - with code names like Project Renegade - delivered.

Republican Sen. Charles Grassley of Iowa, chairman of the Finance Committee, called these findings "an absolute barn-burner," and vowed to end such abuses - retroactive to last Thursday, when his committee received the Enron report.

That will be a tough job. Larger corporations, making most use of tax consultants, increasingly have made a profitable art of exploiting the differences in the systems by which they can report profits to shareholders and lesser profits to Uncle Sam. As a result, corporate income tax revenue as a share of all federal tax revenues has been falling for decades - from almost 14 percent in 1972 to less than 9 percent in 2001.

In 1999, the nation's 10,000 largest companies paid an effective tax rate of just 20 percent vs. the 35 percent statutory rate, costing the Treasury an estimated $50 billion a year. Though less profitable, the next tier of smaller firms paid a higher effective rate.

So who are the real "lucky duckies"?

That unfortunate phrase entered the current tax debate last year with an editorial in The Wall Street Journal arguing too many lower-income citizens - "lucky duckies" - weren't paying taxes because of various breaks like the earned income tax credit. In a nutshell, that's the agenda of the Republican right: Tax cuts for the well-off aren't enough; lower earners should pay more.

Our reaction to that is similar to Senator Grassley's to the Enron report: "It's clear that's what this is all about - money, money, money." Indeed, Enron provides a good example of the overlapping beneficiaries of corporate tax shelters and tax cuts for the well-off: A big share of the company's tax deductions came from huge amounts of executive stock options cashed in before its crash - options given much greater value because of the tax dodges.

In pushing Treasury-busting tax cuts, President Bush might have more credibility with the majority of Americans - who would gain the least - if he also endorsed the Senate Finance Committee's moves to crack down on corporate tax shelters and made sure the Internal Revenue Service had the resources to keep up with such abuses. That hasn't happened - perhaps because, as in Enron's case, both stances benefit much the same crowd.

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