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Massive tax breaks go to biggest takers of bailout money

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POSTED December 6, 2010 3:26 a.m.

You have a lot at stake on what Congress does in the next few days regarding tax rates.

If the current federal tax rates are allowed to expire, independent private sector tax watchdog organizations - as well as the IRS - say a typical household with a net income of $62,500 after deductions will see their tax liability jump $2,200 a year.

The entire debate is being debated in terms of the middle class versus the rich. The broad brush approach has Democrats painting struggling small businesses in the same stroke as large corporations like Citigroup, AIG, and General Motors and the Republicans using the same tactic to lump better off individuals with the average middle class wage easier.

What makes this all disingenuous is the real free tax ride that’s going on and Congress has done nothing to stop it. In fact, in their rush to pass stimulus and bailout bills that most members of Congress admit they didn’t read, the majority Democrats acting in unison with the minority Republicans passed the biggest corporate tax giveaway you can imagine.

And the benefactors are all recipients of massive federal bailouts on the back of the middle class and small businesses.

The Treasury Department in 2008 issued tax guidance along with the bailout funds that allows the recipient firms to use past losses to offset future profits for up to 20 years. A law passed in 1986 prevents a company from acquiring another that was a big money loser in order to use its losses to shelter future profits.

The federal government decided taking bail-out money that involved giving Uncle Sam part or controlling ownership even for brief periods of time wasn’t the same as an acquisition.

And after the IRS made such a ruling it then allowed banks such as Wells Fargo that took over the collapsed Wachovia banking system, to use the losses of the firm they bought at a fire sale price engineered by the federal government to also be used against future profits.

How big of a break is this? Tax experts say Citigroup basically can earn $14.3 billion in profits now without being taxed.

That is just the tip of the iceberg. One of the reasons GM stock fetched so much was the prospectus openly noted that it had the ability to avoid paying taxes on $45.4 billion in future profits thanks to an IRS ruling. That means GM will walk away with $14.5 billion that should have gone to paying to run the federal government or pay down the deficit.

What a deal. GM fails to do what Ford had to do to stay alive, drove the company to the brink, took bailout money from the federal government, used Uncle Sam to muscle a bankruptcy restructuring through in record time that did a number on small investors and firms holding GM debt, helped GM get back on its feet, and then created an attractive stock thanks to giving GM a $45.4 billion tax break against future profits. And - to make matters worse - Detroit is lobbying for big subsidies to make electric cars work.

Feeling better about the debate in Congress this week?

It gets better. Fannie Mae and Freddie Mac also got the same tax break gift.

Together there are hundreds of billions of tax breaks against future profits given to firms that taxpayers saved from going bankrupt.

What Congress should be doing is stopping the continued plundering of the US Treasury by mega-corporations via outrageous special treatment under the tax code and government bureaucrats’ interpretation of rules passed by elected representatives.

In David Cay Johnston’s must-read on corporate welfare - “Free Lunch” - that was a New York Times bestseller for months, he points to the large number of former government bureaucrats and lawyers who regulate the finance industry who ultimately get cushy well paying jobs with said industries.

One can only wonder exactly how effective of a watchdog they are for the rest of us if they are looking for a bigger personal payday down the road.

Congress needs to not just stop creating tax loopholes to water down the effective returns of the federal tax rates, but they need to start writing tighter laws that aren’t open to interpretation and rein in bureaucrats who make monumental decisions in favor of mega-corporations to the detriment of the rest of us.

So while you’re waiting to see whether your taxes will go sky high next year or whether Congress will extend your jobless benefits, take some comfort in knowing that the bailed out corporate world is not only back to paying hefty obscene year-end bonuses but they’re also getting future tax breaks that are as good as gold.

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