I'll give you an example of what I think is a "good" tax deduction.

There are hundreds of "low income apartments" built in the U.S. every year. The apartments are strictly limited for occupancy by people with a demonstrable maximum level of income in order for the development to maintain it's tax free status. The apartments are usually just as nice as apartment projects commanding "market" rents, but often have rents at only 40-60% of similar, even neighboring, apartments which charge market rents. The rents are so low that the economics of the project could not possibly provide a profit unless the state or federal government subsidized the developments in some way. The low income apartment projects are authorized by each state and are generally required to be built where the state deems low income housing is needed. The federal government allocates an amount of tax credits to each state to be distributed at the state's discretion.

Developers are incented to build these projects by being offered very generous federal and state tax credits which are issued once the apartments are built and properly occupied. Developers organize each development the way they usually do, by forming a single purpose partnership. They do that in order to protect themselves, their corporation or their "master" partnership from any risks associated with the development or operation of the individual project (financial failure, lawsuits, etc.)

The downside to forming a bunch or smallish partnerships for risk containment purposes is that the partnership would never generate enough income fast enough for the developer to utilize the tax credits. So they sell the credits to a bank or large corporation for a discount on the total value of the credit. The corporation buying the credit is typically given a controlling interest in the partnership as well as the tax credit. The developer gets the cash from the sale of the tax credit, usually with a long-term contract to manage the property for a fee, and often a minority ownership in the project. At the point when the apartments are up, running and occupied the developer would have already taken significant development and construction management fees. From that point forward, the corporation buying the tax credit can use it to shelter their income from other sources immediately and when they choose to sell the apartment development in the future, they get to take what is usually a healthy profit in the form of a capital gain.

I worked for one of the largest banks in the country and was involved in the formation of this "business" within the bank. Initially, we were allocated $25 million to buy tax credits on this basis. That was enough for about 5 apartment projects. In the almost ten years since I retired, the bank decided that it really likes this business. They now have almost $4 billion invested in low income housing tax credits and are the largest owner of low income apartments in the country. Many other corporations are involved in this same business, but to a lesser degree. The "market" for the purchase of these tax credits has become very competitive. When I started the business for the bank, we were able to buy the credits for 60-65% of the face value of the credit. I think corporate buyers are now paying over 90% to the developers.

I'll tell you the result of the program. The corporations buying these credits shelter huge amounts of income and usually pay little or no federal or state taxes. The "business" of buying tax credits and owning the underlying apartments is hugely profitable to those corporations and the employees involved in that business. From an internal rate of return viewpoint, the low income apartment tax credit business within the bank was far more profitable than any of the other businesses that you normally think of when thinking of what a bank does to make money. The risk-adjusted profitability of this business within the bank was WAAAY more profitable than any of the standard bank businesses (personal banking, mortgage lending, corporate finance, credit cards, etc.).

Is that a "good" tax credit? Yeah, I think so. It gets housing built for low income people which otherwise would not be built. The economics of such projects simply wouldn't work without the tax credit form of subsidy provided by the federal and state governments. The bank or corporation buying the credits makes a whole lot of money.

If there's anyone who might be identified as a "loser" in all this it's John Q. Public, the taxpayers. They're the ones who are providing the capital for the construction of housing for people with very low incomes in the form of foregone income tax revenues. In addition to developing the apartments, a lot of that capital winds up in the coffers of the corporations who benefit from buying the credits, pays bonuses to their employees who do the business, and some goes to the corporate shareholders who get dividends and capital gains when the price of the corporation's stock goes up. Just think, you and I are financing all that. Shouldn't we be proud of ourselves? What a deal!

Originally Posted by Bucco

I am going to ask some stupid questions here so keep your snickers and giggles to yourself but I am not sufficiently informed onthis stuff...so here goes...

1. Corporations that do not pay income taxes need to have "deductions" or credits to make that happen, and in most cases those deductions and/or credits have been allowed because they,on the surface, are good for the country(economy, etc). IS THIS TRUE ?

2. If it is true, the report does not delve into that. Does that not make the report a bit skewed ?

While I generally agree with most comments by STEVEZ and VILLAGE KAHUNA, I find it (the report) to be too much "black and white".

Thanks to whomever takes the time to educate me

A while back I worked for a Swiss company. The company wanted to place a manufacturing operation in the U.S., but got hung up with the government on two issues: 1) paying duty on subsystems manufactured outside the US, but which would be integrated into the final product; and 2) efficiently moving a number of foreign engineers who were integral to the development of the product and establishment of the manufacturing criteria (the visa system was too cumbersome timewise for business reality).

Despite considerable negotiation and concessions (by the company), the final decision was to place the operation in Canada (NAFTA being a consideration).

The end result is the product (with a North American initla market, and later a world market) manufacture ended up on Canadian soil because that government was open to the investment, job creation, and long-term tax benefits to the region.

Until we stop looking at corporations as monsters, but in fact are the catalyst for regional growth, stability and economic dynamics, we are destined for more movement of decent-paying jobs from U.S. soil.