NEW YORK -- U.S. consumer sentiment dropped in October to its lowest level since the end of last year as consumers worried congressional dysfunction and the resulting partial federal government shutdown would hurt growth, a survey released Friday showed.
The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment fell to 73.2 in October from 77.5 in September and was the lowest final reading since December 2012.
The October figure was lower than both the 75.0 forecast by economists in a Reuters poll and the mid-month preliminary reading of 75.2.
Not too pretty but not a disaster after all," said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York. Fiscal fights in Congress "took their toll," with a drumbeat of negative news eroding sentiment.
The government also came close to breaching its borrowing limit, which compounded the crisis and could have pushed the country closer to a historic debt default.
While a last-minute agreement averted that outcome by raising the debt ceiling until early next year, rating agency Fitch warned it could still cut the U.S. sovereign credit rating because of the political brinkmanship.
%VIRTUAL-article-sponsoredlinks%"When asked to describe in their own words what they had heard about recent economic developments, the number of consumers that negatively mentioned the federal government in October was the highest in the more than half-century history of the surveys," survey director Richard Curtin said in a statement.
Other gauges also hit multimonth lows. The index of consumer expectations, at 62.5, hit its lowest since November 2011, and the index of current conditions, at 89.9, hit its lowest since April.
The congressional impasse likely affected growth in the quarter, with Standard & Poor's estimating the shutdown took $24 billion out of the world's biggest economy.
The one-year inflation expectation fell to 3.0 percent from 3.3 percent while the five-to-10-year inflation outlook edged down to 2.8 percent from 3.0 percent.
Galling Tax Loopholes Costing The US Government Billions
Consumer Sentiment Slides on Government Shutdown
Several major U.S. corporations dodge domestic taxes by moving profits internationally to tax havens.
For example, a company can utilize the "double Irish" formula to minimize their U.S. taxes.
If the profits from the sale of a good stayed in the U.S., they would be taxed at the federal 35 percent rate. However, some companies sell the intellectual property rights to an Irish subsidiary to minimize tax obligations.
The profits from that U.S. sale are paid overseas to the Irish subsidiary. As long as the Irish subsidiary is controlled by managers elsewhere - for instance, a Caribbean tax haven - the profits can move around the world without a dime of taxation.
At this point, the profits are moved to a nation with no tax, skirting around the U.S. 35 percent rate.
This is the "Double" part of the Double Irish, and also entails a trip through the Netherlands.
When the same company's product is sold overseas, that profit is routed to a second Irish subsidiary, Since Ireland has treaties with the Netherlands to make inter-European transfers tax free, the profits are then routed through the Netherlands, and then back to the first Irish subsidiary, and then to the no-tax Caribbean Island.
As a result, the U.S. company never has to repatriate the money and they never has to pay taxes on the products.
Carried interest - profits made by private equity investment managers, hedge funds, venture capitalists, and real estate investment trusts - constitutes a major source of income for many financial professionals.
However, carried interest isn't taxed as income. Instead, it's taxed at the capital gains rate, which, at 15 percent, is considerably less than the top bracket tax rate of 39.6 percent that many of the financial professionals would pay.
Facebook reported $1.1 billion in pre-tax profits in 2012, but paid zero federal and state taxes while receiving a federal tax refund of around $429 million.
The reason is that the company took a multi-billion dollar tax deduction for the cost of executive stock options and share awards following their IPO.
In essence, Facebook was able to write off its entire federal tax obligation and more for paying its executives. This has raised the ire of a number of people in Washington, including Michigan Democratic Senator Carl Levin.
A line in the tax code allows a depreciation schedule of five years for private jets instead of seven, the standard for the rest of the airline industry.
Depreciation is an income tax deduction that allows taxpayers to recover the cost of buying the jet. This means that private jet owners can write off their expenses faster (in five years) and make back the money for the jet in less time.
This costs the U.S. government $300 million annually.
Originally designed for small farmers trading assets like livestock or property, the Section 1031 tax break allowed two farmers to avoid capital gains taxes on those transactions.
Since then, major corporations have successfully lobbied for an expansion. Because of this, many companies can go about their business of buying and selling assets, but can escape the capital gains tax, as long as they use all the proceeds from a sale to buy a "like-kind" asset.
For example, a real estate investment group can avoid taxation on a major land sale by invoking Section 1031, and using all proceeds from the sale on another land buy.
Wells Fargo, Cendant, and General Electric were recently sued for abusing the practice, but the law remains on the books.
In 2011 you could write-off the full cost of an SUV, provided it was used exclusively for business and weighed more than 6,000 pounds.
Since then the relevant section of the tax code — Section 179 — has been scaled back significantly, but the process still allows people to deduct the full purchase price of qualifying equipment or software if it's used for business.
Today, acceptable write-offs include taxis and vehicles that can seat more than nine passengers, have no seating behind the drivers seat, have a fully enclosed driver's compartment, or have a cargo area at least six feet in length (like a pickup truck).
When an executive flies on a private plane for business reasons, the company pays the bill and deducts the expense. However, if the flight is provided to the executive for personal reasons, the executives are required to pay income taxes on the amount the company paid for the flight, as the IRS considers travel as a form of compensation.
But if an outside security consultant says that the executives need a private jet for security reasons, the executive doesn't need to pay the tax.
According to Dealbook, it's "a common corporate tax trick," that allows many virtually anonymous executives - Melvin J. Gordon of Tootsie Roll Industries, Terry Lundgren of Macy's, the heads of Cablevision, Time Warner, Kraft, Waste Management, and Home Depot, for instance - to enjoy the kind of "security" that Apple didn't bother providing Steve Jobs.
Board members are also frequently rewarded with flights for "security" purposes.
As part of the TARP bailout, NASCAR owners got a huge tax gift written into the tax code. It's still around today, as it was extended for another year as part of the "Fiscal Cliff" deal.
Much like the private jet depreciation advantage, NASCAR track owners are now allowed to write off the cost of building facilities in seven years, rather than the 39 years the government estimates it actually takes for the tracks to depreciate.
This means that NASCAR track owners make their money back even faster, but the government loses $40 million each year.