Bechtel’s “Mini” Masquerade“Though Bechtel is the world’s largest telecommunications, engineering and construction firm (with $32.9 billion in revenue and 52,700 employees), in terms of corporate structure it is one of America’s largest “small businesses.” That’s because the giant corporation takes advantage of a 1958 law intended to extend limited liability protection to owners of small, family-owned businesses. Companies that qualify for this law’s “S Corporation” status do not have to pay federal corporate income taxes. Instead the company’s profits are reported as personal income by individual owners. While the Bechtel empire was hardly the intended beneficiary, their firm technically qualifies for the S Corporation status because it is family run and has less than 100 shareholders.
At the time the law was enacted, the wide differential between top corporate tax rates (52 percent) and top individual rates (91 percent) was a disincentive for gaming the system to dodge taxes. Fast forward half a century and top tax rates have collapsed to only 35 percent for corporations and individuals, erasing the previous disincentive for big corporations to change their business status. By incorporating as an S Corporation, enormous businesses like Bechtel pay just individual taxes, rather than having their corporation pay taxes on corporate profits and shareholders pay taxes on their dividends.
S Corporations, and other businesses where income is taxed only at the individual level, have become the new tax haven, where large businesses have fled to avoid US corporate income taxes. In 2008, more than 14,000 S Corporation tax returns were filed by firms with more than $50 million in revenue, according to the IRS. These 14,000 firms, with an average profit of $6.4 million each, collectively reported 29 percent of the total profit on nearly 4 million S Corporation tax returns. Preserving S Corporation status for real small businesses can help level the playing field, but closing the loophole that allows giant multinational corporations to avoid the corporate taxes that their peers have to pay is key to bringing more fairness to the tax code and more funds into public coffers.
As the 99% Spring unfolds, restoring fairness to our tax code must be at the center of the debate. As it stands, our tax system rewards those at the top, robbing the rest of us of the public money we need to transform the economy from one that works for the 1 percent to one that works for the 100 percent.A note on the chart. Corporate tax rates were calculated using current federal corporate income taxes paid in 2011 divided by 2011 US pretax income, as reported in company 10-K annual reported filed with the Securities and Exchange Commission. Deferred taxes, which might be paid some day in the future, were excluded, as were income taxes paid to state or local governments. Individual tax rates were taken from a recent Citizens for Tax Justice report.”