A Key Source of Our Massive Deficit

As the election season kicks into high gear, the U.S.'s budget and, specifically, the country's hefty deficit, is a central, hotly contested issue.

While I tend to steer clear of stepping onto political third rails in my writing, Reuters' coverage of the Institute for Policy Studies' recent study on CEO pay caught my eye. Titled "Executive Excess 2012: The CEO Hands in Uncle Sam's Pocket," the IPS' study looks at a handful of public-company CEOs whose paychecks are larger than what their companies pay in taxes. The list included drugmaker Abbott Labs (NYSE: ABT  ) , which IPS gave the cheeky heading "take 64 tax havens and call me in the morning," and natural-gas driller Chesapeake Energy, which IPS said was "drilling for loopholes."

The report is a controversial one for sure -- Reuters quoted Abbott spokesman Scott Stoffel as saying it was "a blatant misrepresentation of the facts." But while the tax-to-CEO pay comparison is eye-catching, I was particularly struck by what Reuters said about megabank Citigroup (NYSE: C  ) , which was one of the higher-pay-than-taxes targets:

A Citigroup spokeswoman said that, while the company did not pay federal income tax in 2011, that was due to substantial losses it recorded in 2008 and 2009, a break available to all businesses in similar straits. ... She also noted that Citi paid on average $3.7 billion a year in federal income taxes from 2000 to 2006...

In fact if we look at total taxes paid (a different approach than IPS took), Citigroup paid around $3 billion in taxes over the past 12 months. That compares to nearly $8 billion in taxes paid in 2006 and more than $9 billion paid in 2005. AIG (NYSE: AIG  ) , another company in IPS' crosshairs, is even more striking. Over the past year, it's gotten a total tax rebate of nearly $17 billion -- mostly the impact of releasing $16.6 billion of its deferred tax assets. By comparison, AIG paid $6.5 billion in total taxes in 2006 and just over $4 billion in 2005.

Between just two companies, that's a swing of $27 billion in total taxes between 2005 and this past year.

And Citi and AIG are hardly alone. In 2006, Bank of America (NYSE: BAC  ) paid close to $11 billion in total taxes. It's coughed up just over $2 billion over the past 12 months. And remember, B of A has since swallowed both Merrill Lynch and Countrywide Financial -- combined, those two companies paid more than $4 billion in total taxes in 2006. JPMorgan (NYSE: JPM  ) , lauded for navigating the financial crisis well, has paid slightly more in taxes over the past year than it did in 2006, but it's subsumed former independent taxpayers Bear Stearns and Washington Mutual since then.

This isn't a novel point -- my fellow Fool Morgan Housel has done a great job breaking down the reasons for the deficit and put falling tax revenue front and center. But as we hear the rhetoric cranking up on both sides around our country's deficit, it's not always what seems most obvious that's at the root of the problem.

Less tax, more profit?
As for Bank of America, a lower tax burden may be good for the bottom line, but investors need to consider a lot more before investing in this banking behemoth. To get the lowdown on exactly what you need to consider when weighing B of A as an investment, check out The Motley Fool's premium special report, "Will Bank of America Break Your Portfolio?"

The Motley Fool owns shares of Abbott Laboratories, Citigroup, Bank of America, JPMorgan Chase, and Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of American International Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Bank of America and Abbott Labs, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (12) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2012, at 3:01 PM, DividendsBoom wrote:

    So one stategy to have banks pay more taxes is do everything possible to stop them from making money

  • Report this Comment On August 17, 2012, at 6:16 PM, donbcms wrote:

    The main source of our massive DEFICIT is our TAX CODE??? With $1.1TRILLION

    in "breaks"; PLUS 45% paying NOTHING, add in the "CUTS" & "CAPS": THERE IS YOUR DEFICIT? "AX THE TAX CODE"??

  • Report this Comment On August 17, 2012, at 6:26 PM, Patastic wrote:

    Of course you don't need to borrow if you ay cash.

  • Report this Comment On August 17, 2012, at 6:33 PM, DJDynamicNC wrote:

    Good article and good points.

  • Report this Comment On August 17, 2012, at 7:31 PM, modeltim wrote:

    This article makes a lot of sense. I'd like to see a graph comparing the rise of executive pay and the federal deficit since 1981.

  • Report this Comment On August 18, 2012, at 9:21 AM, sanesinc wrote:

    So.....what were your metrics? Simply stating that you used different metrics doesn't fly. On what basis should one accept your analysis?

  • Report this Comment On August 18, 2012, at 9:47 AM, gcp3rd wrote:

    While I am all for fair and appropriate taxation, who can give me an answer for the question: Doesn't all corporate tax ultimately just get passed through to the consumer? Taxes for businesses are just another expense - if it costs an extra 50 cents per widget to be profitable because of the taxes the business pays, they will raise the price of their widget to account for that 50 cents cost and the consumer will pay it. ??

  • Report this Comment On August 18, 2012, at 1:38 PM, DonkeyJunk wrote:

    ^ So, taxation drives inflation? I don't know that I'm completely on board with that. AIG and other banks certainly haven't reduced their costs to consumers to stay in line with their reduced tax burdens.

  • Report this Comment On August 18, 2012, at 2:00 PM, GrumpyOldGuy wrote:

    I think I'm in a bad mood. If a Corporation is paying 15% taxes and gives the CEO a huge raise such that he/she pays 25% taxes, did the IRS come out ahead or will the Left just find something new to whine about?

  • Report this Comment On August 19, 2012, at 10:14 AM, xetn wrote:

    The key to the huge debt is the fact that our country keeps spending more and more EVEN in spite of the decrease in revenues.

    Also, add in the off-budget items (entitlements, etc) and we have unfunded liabilities of some 220 trillion dollars, according to a recent study.

    As for the tax code, there is no such thing as a "fair" tax.

  • Report this Comment On August 19, 2012, at 3:51 PM, Melaschasm wrote:

    Personal and corporate income falls during every recession. Income recovers during every recovery, resulting in tax revenue that is greater than ever before.

    However, an annual surplus is more rare than seeing Haley's Comet without a telescope. As the economic recovery gains traction, federal revenues will exceed prior highs. But that will not result in a reduction in the total debt. Spending has consistently grown faster than tax revenues for many decades.

    One would have to be naive to believe that an economic recovery would pay off our national debt, even before considering our worsening demographic situation.

  • Report this Comment On August 22, 2012, at 1:10 PM, Seanickson wrote:

    yes not all companies have current earnings matching the boom year of 2006, especially banks.

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