A recent report to Congress revealed that effective tax rates (ETRs) for large corporations were lower than the statutory rates– a lot lower.
Last year, Democrat Sen. Carl Levin (Mich.) and Republican Sen. Tom Coburn (Okla.) asked the U.S. Government Accountability Office (GAO) to research the extent to which corporations are paying U.S. corporate income tax. Levin is chairman of the Committee on Homeland Security and Governmental Affairs; Coburn is a ranking member.
In May, the GAO responded with a 42-page study (Read the Full Report Here). In its letter to the Senators, the GAO writes, “Proponents of lowering the U.S. corporate income tax rate commonly point to evidence that the U.S. statutory federal corporate income tax rate of 35 percent, as well as its average effective tax rate (ETR), which equals the amount of income tax corporations pay divided by their pretax income, are high relative to other countries. However, our 2008 report on corporate income tax liabilities found that nearly 55 percent of all large U.S.-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005.”
The study, conducted from March, 2012 through May, 2013 compiles income and expense data reported to the IRS on Schedule M-3s (filed by corporations with assets > $10 million) for tax years 2008-2010, the most recent years for which tax data is available.
The GAO found that profitable companies paid an average tax rate of 12.6 percent on their worldwide income, which as the authors note is “slightly lower than the 13.1 percent rate based on the current federal tax expenses that they reported in those financial statements; it is significantly lower than the 21 percent effective rate based on actual taxes and taxable income, which itself is well below the top statutory rate of 35 percent.”
So why the huge gap between statutory and ETRs? You might think its due to income taxes paid to foreign, state and local governments, but you would be wrong: “Even when [these] taxes are included in the numerator, for tax year 2010, profitable Schedule M-3 filers actually paid income taxes amounting to 16.9 percent of their reported worldwide income.”
What about unprofitable companies? The problem with including them in this measurement is that their losses greatly offset the taxable income of profitable firms. Moreover, because these companies pay little, if any, income tax, including them does not “accurately represent the tax rate on the profitable corporations that actually pay the tax.”
The study also shows that in the last half-century, corporate taxes have accounted for less and less of federal tax revenue:
So what’s all the fuss from large corporations about high tax rates then?
Let’s hear from a few corporate executives:
- 3M Co.: In April, the U.S. based multinational submitted their thoughts on tax reform to the Committee on Ways and Means Manufacturing Workgroup. In its statement, the company argued to lower the top corporate income tax rate to 25 percent while cutting tax breaks. “In some cases, the high US tax rate is mitigated by tax credits and deductions. These credits and deductions, however, often fail to adequately encourage the behavior they were designed to incentivize and often create competitive imbalances between US companies.” 3M is one of a handful of companies to publicly agree to exchanging valuable tax breaks, such as the research and development credit and accelerated depreciation, for lowering overall rates (Read more on Bloomberg.com). 3M pays a relatively high ETR of around 30 percent.
- Corning, Inc.: The 126-year-old glass and manufacturing company paid an ETR of negative 0.2 percent in 2011. That didn’t stop its Vice President of Tax, Susan Ford, from telling the Ways and Means Committee that “American manufacturers are at a distinct disadvantage to competitors headquartered in other countries. Specifically, foreign manufacturers uniformly face a lower corporate tax rate than U.S. manufacturer.” Ford also claimed her company’s ETR was 36 percent, a bloated rate that reflects deferred taxes (taxes not yet paid) on foreign income that will likely never make it back to U.S. tax authorities. (Read more: Corning pays zero federal taxes, tells Congress that’s too much)
- Apple, Inc.: Following a report by the Senate Permanent Subcommittee on Investigations that revealed Apple stashed $44 billion in offshore taxable income between 2009 through 2012, they asked C.E.O. Tim Cook and other Apple representatives to appear before a Senate hearing. In its testimony, Apple said it supports comprehensive corporate tax reform, but claimed they had done no wrong, pay an extraordinary amount in U.S. taxes, and do not use tax gimmicks. Many tax experts found that last claim laughable, including the Committee’s top Republican, Sen. John McCain (Ariz.), who said, “in my view, Apple has violated at least the spirit [of federal tax laws] if not the letter of the law.”
The companies above, as well as most Republicans in Congress, support lowering the top corporate tax rate to 25 percent and moving to a territorial system where most offshore profits cannot be taxed. Proponents argue this would allow companies to re-invest foreign profits in the U.S. without having to pay a hefty toll (Watch: Advantages of a Territorial Tax System). Critics of such a system say that it would further incentivize channeling profits overseas, worsen the deficit in the long run and hurt domestic businesses (Read More: The Fiscal and Economic Risks of Territorial Taxation).
Lowering the overall rate may be more palatable to Democrats if it is revenue-neutral, however Chairman of the Senate Finance Committee, Max Baucus (D-Mont.), who is working on a bi-partisan tax reform plan, said that 25 percent was “a bit of a stretch.”
And so the debate over corporate tax reform rages on. But maybe, just maybe, Congress will take the GAO report to heart and usher in a new era of comprehensive reform. After all, the last time Congress managed such an overhaul was in 1986. President Ronald Regan led the charge after learning that his former company, G.E., used accounting gimmicks to avoid paying any federal taxes. “I didn’t realize things had gotten that far out of line,” Regan reportedly said, before promoting tax reform that raised the corporate rate to where it is today.
- Profitable U.S. Companies Paid 12.6% Taxes in 2010: GAO – Bloomberg (bloomberg.com)
- Corporations Never Had It So Good (ataxingmatter.blogs.com)
- U.S. Corporations Pay Average Effective Tax Rate of 12.6 Percent (dailyfinance.com)
- U.S. Companies Overtaxed? Please. Study Shows Large Firms Paid 16.6% Federal Rate In ’10 (forbes.com)
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