A solution for our corporate income tax debate

September 22, 2011

My usual journalistic role is to expose wrongdoing, point with alarm, and distill complicated information into clear explanations of what’s really going on in the world. I rarely offer specific solutions, because that’s not my job — I’m an observer and critic, not a policymaker.

Today, though, I’m going to depart from form and suggest a solution to a problem that’s plaguing the current debate about corporate income taxes: too many numbers, too little knowledge.

It’s simple, really: Get the Financial Accounting Standards Board to make public companies disclose one number that’s currently not required — the amount of federal income tax they pay for a given year. Companies report plenty of tax numbers, but not that one.

Here’s why we need this change. There have been a zillion stories, blog posts, online comments, reports, tweets and who knows what else in recent months about how much income tax U.S. companies do or don’t pay. Many of the pieces — including the New York Times’ agenda-setting March 25 story claiming that GE paid no U.S. income tax for 2010 — are wrong, because they confuse numbers that companies use to calculate earnings with the amount they pay the IRS.

That is also true of the Institute for Policy Studies’ recent Executive Excess 2011 report comparing chief executives’ compensation packages with the U.S. income taxes their companies paid. (A great idea, by the way.)

Both the Times story and the IPS study conflate an accounting entry called “current portion of U.S. taxes” with the taxes a company sends the IRS. But the two numbers are rarely the same. “For multinational companies and companies issuing nonqualified stock options, it is very unlikely the ‘current’ income tax expense as reported in the financial statement will represent the actual income taxes paid as reported on the tax return,” says Ed Outslay of the Michigan State University business school, a leading tax scholar. Please note that most sizable U.S. companies have stock options, multinational operations or both.

Scott Klinger, chief author of the IPS study, readily concedes that “current tax” is a “best approximation” rather than the actual amount that companies pay the IRS or get back from it. However, the study doesn’t say that.

The Times is less forthcoming. In an Aug. 31 story about the IPS study, the Times, in passing, quoted GE as saying that it paid some federal income tax for 2010. The Times, which declined to comment, hasn’t reconciled that with its March (“Its American tax bill? None.”) version. Or with a Sept. 11 story that said — correctly — that only the companies know how much income tax they pay.

(Disclosure alert: In April, Jeff Gerth of ProPublica and I wrote about GE’s tax situation, pointing out the Times’ original mistake and making the same points the Times has since made in its August and September stories. The Times deserves credit for evolving. It’s nice to have company in what had been a lonely position.)

Adding to the confusion about who owes what to the IRS are numbers from cash flow statements (not to be confused with profit-and-loss statements) that show taxes companies paid in a given year. Alas, taxes paid in a given year aren’t the same as taxes paid for a given year. Payments could be for earlier years or future years, or could be estimated taxes paid that year that will be refunded in the future. You can find a number to support whatever case you want to make. Verizon is using selected numbers to rebut what the IPS study said about it. Exxon Mobil (in which I own stock) is using selected numbers to rebut a Wall Street Journal op-ed by Sen. Bernie Sanders (I–Vt.).

It would be nice if corporations voluntarily disclosed their actual tax bill so that we could have an informed discussion. But even if some decide to do so, most won’t.

The obvious and simple solution is to have the Financial Accounting Standards Board require companies to disclose how much tax they paid for a given year. Why doesn’t FASB require that now? Apparently because the appropriate parties, whoever they may be, haven’t asked.

“The FASB has not received any recent requests relating to the information currently provided about income taxes,” FASB spokesman Robert Stewart says. “The FASB is always willing to consider ways to improve the usefulness of financial information for investors.”

Okay, I’m requesting. Anyone want to second me? 

Sloan is Fortune magazine’s senior editor at large.

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