Monday, July 23, 2012

Fun and Games With Corporate Taxes

A recent article making the rounds in the mainstream media discusses the use of tax havens by the ultra-wealthy, an issue that has made headline news in the United States, particularly as Mitt Romney is making a mad dash for the Oval Office.  As I have posted before, it is not just individuals that are trying to avoid taxes with the use of overseas tax havens, corporations have a long history of doing the same thing in a desperate attempt to avoid paying America's 35 percent corporate marginal tax rate.

As shown in this paper by Citizens for Tax Justice (CTJ) entitled "Corporate Taxpayers & Corporate Tax Dodgers 2008 - 10", out of the 280 large and highly profitable corporations in the study, one quarter paid an effective tax rate of less than 10 percent and an equal number actually paid something close to the 35 percent official rate on total pretax U.S. profits of $1.4 trillion.  Here is a chart showing a summary of the three year tax rates for the 280 companies in the report:

Seventy-eight of the companies paid zero or less in federal income taxes in at least one year between 2008 and 2010 with a total of 108 no-tax years while earning a total of $156 billion in pretax United States profits which, without loopholes, would have generated $55 billion in corporate income taxes.  In fact, many of these companies actually generated enough deductions to warrant a negative tax situation, resulting in Americans who actually pay taxes, forking over a total of $21.8 billion in tax refunds.  Here is a chart showing the 30 corporations that paid no total income tax over the three year period:

Notice the presence of major household-name American corporations including General Electric (home of CEO Jeffrey Immelt, President Obama's choice for his job czar), Corning, Pacific Gas and Electric, Verizon, Boeing, Mattel and Honeywell among others.  These 30 tax avoiding companies generated $160 billion in profits in the three years between 2008 and 2010 and yet paid an average negative effective tax rate of 6.7 percent and actually received a total of $10.74 billion in tax rebates.

Here is a chart showing the 25 companies with the largest total tax subsidies between 2008 and 2010:

You have to love seeing companies like ExxonMobil, Duke Energy, Devon Energy and Chesapeake Energy among the crowd that got subsidized by taxpayers, don't you?  These four companies alone received tax subsidies totalling $11.094 billion.   Think about that the next time you pay $30 to top up your gas tank.

Now that we've put to rest the myth that American corporations actually pay the 35 percent corporate tax rate, here is a chart showing the average effective corporate tax rate for various industries over the three-year period:

On total profits of $1.353 trillion over the three-year period, the 280 companies in the study paid a total of $250.8 billion in taxes, yielding an average effective tax rate of 18.5 percent.  The effective tax rate varied from -13.5 percent for corporations involved in Industrial Machinery to a high of 30.4 percent for Health Care corporations.  Oil, gas and pipeline companies paid an effective rate of 15.7 percent and financial companies (i.e. the banking industry) paid an effective rate of 15.5 percent.

How do American corporations get such low effective tax rates?  Here are the four mechanisms by which the corporate tax rate is reduced:

1.) Accelerated depreciation of capital investments.
2.) Stock options, primarily for executives.
3.) Industry-specific tax breaks.
4.) Offshore tax sheltering allows corporations to shelter their profits into their foreign subsidiaries.

Here's one last graph showing how federal corporate taxes as a percentage of GDP has dropped over the five decades from 1960 to the present:

In the 1960s, corporate taxes covered one-quarter of total federal spending.  In the 1990s, the average dropped to 11 percent and, by fiscal 2010, corporate tax revenue covered a tiny 6 percent of federal government spending.

In closing, here is a quote from Susan Ford, Vice President of Tax at Corning Incorporated who recently testified before the House Committee on Ways and Means about the competitive disadvantages to America's high corporate tax rate:

"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. manufacturers, and virtually all operate under territorial systems which encourage investment both abroad and at home." 

I think that she forgot to mention that, according to CTJ, between 2008 and 2011, Corning was one of 26 companies that paid no American income taxes despite earning nearly $3 billion in profits during that time and that her employer is sheltering profits earned in overseas subsidiaries.

One has to admit that something needs to change when most individual Americans are paying more taxes than Verizon, Wells Fargo, General Electric, Boeing and DuPont combined.  This is something that all of us need to remember when our elected elite insist that, in order to remain competitive, corporate taxes simply must be lowered.


  1. In general, established elites will not want to permit even small changes that are to their disadvantage. This cannot go on forever.

    I hope balance can be restored without war, revolution or massive disruption. That is what democracy is meant to be about...

  2. I was the Corporate Director-Taxation for a Fortune 500 company for over 15 years.

    I think you are overstating the case here about tax shelters and tax havens for corporations but two simple changes would take away all questions.

    1. Make all corporations pay tax on their reported book income. Do away with all provisions in the Tax Code where there is a book/tax difference-accelerated depreciation, r&d credits etc. and reduce marginal tax rates correspondingly.
    2. Adopt a territorial tax system like the rest of the world. The U.S. taxes all income from whatever source derived and then has to provide a foreign tax credit to prevent taxing the same income twice. This adds a lot of complexity and is a big reason why corporate taxation is so confusing and articles like this get written.

    While we are at it we should do the same thing for individual taxation. Eliminate all itemized deductions and credits and go to a flat tax with an exemption equal to the poverty limit guideline or some other index that would make sense. This would maintain progressivity that we are used to. For 2012 that is about $11,000 for a single individual and 24,000 for a family or 4.

    We would put a few tax lawyers and accountants out of work but we would greatly simplify and, more importantly, add significant credibility to the system. A big problem with the current system is that everyone thinks someone else is getting some type of special tax benefit or preference in the Code. Let's get rid of that distraction and focus on creating jobs for people.

  3. Thanks for both of your comments. Simplifying the tax code and eliminating all loopholes for both individuals and corporations would go a long way to restoring trust in our governments. All forms of income should be taxed equally, including payments of all types to elected government representatives.

  4. I agree with the last two posts above. It is ironic that the US corporate tax system has higher marginal rates that the canadian system; but the effective rate is lower.

    The US should follow a similar model to the CDN corporate tax system. With having very few special deductions (still too many; but its a step forward).

    I also like the idea of harmonizing Tax GAAP with the accounting standards; therefore corporate income tax is derived from the net income figure and do away with the future income tax liability general ledger account.

    I think a simplified corporate tax rate would also do more to encourage foreign companies into our jurisdiction. Since it is usually the marginal rates of corp tax that are used for net present value analysis (i've met very few finance people incorporate special deductions into their NPV analysis; they always seem to use marginal rates when I talk to them due to a lack of understanding of corporate taxation).

  5. Nice article. Here is a difference perspective on those same tax trends.

    The reason the tax code is (approx) 72,000 pages is because that complexity behooves the larger corporations, as evidenced by the fact that they continue to pay less and less taxes. "The proof is in the pudding". The tax code is a continuing and expanding gift to corporations and very wealthy individuals, and that comes at the expense of the general public.