Estimating the actual effective income tax rates that U.S. corporations pay is tricky. Tax returns are confidential documents under strict laws, never released by the IRS for public scrutiny. Corporate accountants and tax lawyers abide by rigid professional codes of secrecy. The information that corporations include in their publicly available financial statements is often incomplete. Sometimes it’s even misleading.
A new report released Monday by the General Accountability Office slices through the smoke and mirrors and gives one of the most accurate pictures yet of the U.S. corporate tax burden. The GAO’s data shows that taxes in fact are not a burden at all for the big multinationals. The effective rate of taxation for the biggest companies is even smaller than previously thought.
|For U.S. corporations with assets above $10 million, the General Accountability Office found that
in fact the average effective tax rate
is only 13 percent.
The statutory federal tax rate for most large corporations is 35 percent. Most people know that virtually no major corporation pays this high a proportion of their earnings to the Treasury. Instead America’s corporate titans game the tax code and accounting rules to retain as much cash as possible. But by exactly how much? A few high-profile cases like General Electric’s 2 percent tax rate over the last decade illustrate perfected tax avoidance, but what about the entire corporate sector? How rampant and costly is tax avoidance? How many companies take on tax planning with the obsessive focus of Apple, Inc., or Hewlett Packard?
Previous studies examining mostly public financial statements of corporations have estimated an average effective rate of between 22 and 31 percent. Using tax returns obtained from the IRS for U.S. corporations with assets above $10 million, GAO researchers found that in fact the average effective tax rate is only 13 percent.
When the GAO’s researchers included the tax payments made by the these companies to other nations, corporate taxes paid to U.S. states, and taxes to local governments, the total effective tax rate only rises to 17 percent. It turns out then that the largest U.S. corporations are paying on average only half the statutory rate of 35 percent.
“Large, profitable U.S. corporations as a whole are not paying their fair share in taxes,” said U.S. Senator Carl Levin upon releasing the GAO report yesterday.
Levin, chair of the Senate’s Permanent Subcommittee on Investigations, ordered the report as part of a larger foray into corporate tax shams. Last month Senators Levin and John McCain put Apple, Inc.’s tax avoidance techniques under a microscope during a Senate hearing, dissecting the tech giant’s Irish and British Virgin Islands subsidiaries and massive pile of overseas cash.
Corporate tax rates are at historical lows. Taxes on corporate earnings crested in the 1960s at about 50 percent, falling quickly in the 1980s and 1990s to 35 percent. Over this same period, corporate tax strategists were devising schemes to further reduce the effective rates applying to their clients, and to write hundreds of complex loopholes into the Internal Revenue Code for everyone from oil companies to drug manufacturers.
The effect is that whereas in the 1950s corporate income taxes accounted for upwards of one quarter of all federal revenue, today corporations provide probably less than 15 percent.
Making up for most of the lost revenue has been individual income tax receipts, and social insurance and retirement tax receipts, and these taxes have become more regressive over the years.
Thus the burden of funding the federal government has been significantly transferred from corporations to individuals, and within individual and family tax filers it has been shifted from the wealthy to the middle class.
|Whereas in the 1950s corporate income taxes accounted for upwards of one quarter of all federal revenue, today
probably less than 15 percent.
Many of the tax rules and loopholes used by American corporations to slice in half their intended tax rates were implemented within the last 15 years.
Two key changes were written into the Internal Revenue Code and policy guidelines in 1997 and 2004.
Known as the “check-the-box” regulations, and the “CFC Lookthrough Rule,” these obscure tweaks to the tax code have allowed companies like Pfizer, Microsoft, Google, and Walmart to shelter upwards of $1.7 trillion in cash abroad in tax havens where the statutory tax rates are sometimes as low as zero percent, and where governments have struck special deals to garner direct investment by the gargantuan corporations.
Using a technique called “transfer pricing,” U.S. multinationals have built global webs of subsidiary companies and holding companies whose sole purpose is to take title to valuable assets, and to book overseas income, while the U.S. parent corporation records as many losses as possible.
The income booked abroad remains untaxed, boosting the company’s share value, while the domestic losses are tax-deductible.
“When Congressional leaders talk about tax reform, closing egregious corporate loopholes, particularly those that enable corporations to shift income and intellectual property to offshore tax havens, ought to be at the top of the list,” Levin said.
Levin is particularly opposed to the ongoing obsession some in Congress have with revenue neutral reforms as they would, in his view, “just bake into the tax code all the revenues lost to multinational corporation’s current tax avoidance.”
Darwin Bondgraham is a sociologist and journalist who writes about political economy. His writing has appeared in Counterpunch, Truthout, Z Magazine and others. Follow him @DarwinBondGraham.