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 (NYS: 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 (NYS: 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 (NYS: 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 (NYS: 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 (NYS: 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 article A Key Source of Our Massive Deficit originally appeared on Fool.com.

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.

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stopgoptreason7

Time to repeal the dubya and raygun tax cuts for the rich and bring back the 90% tax braket for incomes over $5 Million per year.

August 17 2012 at 4:17 PM Report abuse rate up rate down Reply
lat3934715

IPS very conveniently avoided writing about GM who was granted, outside of the bankruptcy proceedings, by the OBAMA administration around $20 billion of tax credits .

August 17 2012 at 1:53 PM Report abuse rate up rate down Reply