Imagine being a brain surgeon given the job of fixing a tumor without being able to see its true size or shape. That wouldn’t work too well, would it? It would be even worse if you thought you knew the tumor’s size and shape but you had it wrong.
Sure, that sounds ridiculous. But that’s the situation we find ourselves in when it comes to fixing the federal corporate income tax, which has a 35 percent stated rate but more holes than Swiss cheese.
The only people who know for sure how much a company pays in U.S. income taxes are a few insiders. But people think they know a major reason for what should be a rational conversation getting bogged down in histrionics.
Why write about this now? Three reasons. First, it’s shortly before Tax Day. Second, companies, smelling money, are forming groups with noble names like RATE (for Reforming America’s Taxes Equitably) and LIFT (Let’s Invest For Tomorrow) to push corporate tax “reform” agendas that — shock city! — would work primarily to their benefit. Finally, this is the time of year that we begin to see the highly publicized but badly flawed tax studies that various groups produce by aggregating the flawed numbers in corporate Form 10-K annual reports, most of which are filed in late March.
There are more than a dozen tax metrics disclosed in a 10-K — but not the federal income tax incurred for a given year. So when the likes of Paul Ryan talk about needing to cut the corporate tax rate to 25 percent, there’s no possible way that he — or anyone — can compare that with what companies pay now.
There is no way that corporate critics can know, either. The stories you read about disgracefully low corporate taxes are based on the “current portion” of taxes due, disclosed in 10-K footnotes. Many people — including me, years ago, before I learned better — use that number as a proxy for the federal income tax that a company pays. But that’s a mistake.
The current-portion number is something that companies report for purposes of calculating earnings, and it has no connection whatsoever with what a company actually forks over to the IRS for a given year. These numbers are typically rather low relative to a company’s reported pretax income — after all, management wants to please shareholders by reporting high earnings.
After the critical reports and stories surface, companies — which won’t disclose what their federal incomes really are because they’re not legally required to do so — return fire by citing another number from their 10-Ks. That’s the “taxes paid” number disclosed in their cash-flow statements. “Taxes paid,” however, lumps together federal, state, local and foreign income taxes. You can’t tell how much federal income taxes are, or what year or years are covered by the payments.
The solution to our appalling lack of accurate corporate tax numbers is simple: Require companies to publicly disclose some key numbers, including federal taxes paid for a given year, from their tax returns. It would take maybe one hour a year to file these numbers with the Securities and Exchange Commission. That doesn’t seem like much of an imposition.
Congress could order companies to do this but has never done so and probably never will. I do, however, have some hope for the Financial Accounting Foundation, which could order the Financial Accounting Standards Board to require companies to disclose their tax figures. Last year, I proposed that the FAF require this disclosure, and the opinion site Bloomberg View seconded the motion. We got nowhere, but this is a new year.
Robert Stewart, a spokesman for the FAF, says the foundation is conducting a “post-implementation review” of income tax reporting standards. “If they get significant comments from folks who feel the way you do, they will consider addressing the issue,” Stewart told me.
So e-mail pirteam@
faf-fasb.org to say you want to see companies tell us how much federal income tax they pay each year; you can copy me at firstname.lastname@example.org. Think of that e-mail the way you would about eating chicken soup to battle illness: It may not work, but what can it hurt?
Sloan is Fortune magazine’s senior editor at large.