CORPORATIONS: ARE THEY PAYING FAIR TAXES?

Here’s issue #2 of my Policy and Politics newsletter, written 11/5/11. It’s a bit long and dense, but has important information corporate taxation. I’ll be shorter and sweeter in the future!

I’m very concerned about the pervasive and powerful influence corporations have on our every day lives, as well as on our politics and policy in the United Sates. This is a theme I will address fairly regularly. I will attempt to link various facets of this influence together, because I do believe the whole is more than the sum of the parts and that the reinforcing interactions among the various facets often go unnoticed and underestimated.

A study just came out of 280 of America’s most profitable companies (all were profitable in each of the last 3 years, 2008-2010, and all are from the Fortune 500 list). [1] The study finds that:

1.   Many large corporations pay taxes at actual rates much lower than the stated rate of 35% despite being quite profitable, with roughly a quarter paying no taxes at all.

• The average effective tax rate for all 280 companies in the study over the three year period was 18.5%; roughly half the 35 percent rate they theoretically pay. (Note: An individual with over $35,000 in income and a couple filing jointly with over $70,000 in income are taxed at a 25% rate.)
• About a quarter of the companies (71) did pay an average effective tax rate of 32%.
• Almost a quarter of them (67) paid an average of no federal income tax over the last three years, despite combined profits of $357 billion.
• 30 of these companies actually got money back from the government (i.e., had a “negative income tax rate”) over the three year period, despite combined profits of $160 billion. For example, GE paid a rate of negative 45% and Verizon negative 3%.
• The top ten defense contractors with profits of $67 billion over 3 years paid at an average rate of roughly 15%.

2.   Many large corporations receive subsidies from the federal government.

• Total tax subsidies given to all 280 profitable corporations amounted to $223 billion over 3 years.
• The financial services industry received the largest share (17%) of all federal tax subsidies over the last three years.
• Wells Fargo tops the list of 280U.S.corporations receiving the most in tax subsidies, getting nearly $18 billion in tax breaks from theU.S.treasury in the last three years. Others in the top 20 include AT&T, Verizon, GE, IBM, Exxon Mobil, Boeing, Goldman Sachs, Proctor & Gamble, Wal-Mart, Coca-Cola, and American Express.

3.   Corporations are paying less in taxes today than they used to, measured in a variety of ways.

• The corporate tax rate today is 35%; it was 46% up until 1986. The overall effective corporate tax rate (i.e., what was actually paid) today is 18.5% for these 280 corporations; it was 26.5% in 1988. This is a 24% reduction in the stated tax rate and a 30% reduction in the effective tax rate based on what is actually paid.
• In 2010, corporate taxes paid for 6% of the federal government’s expenses, roughly half of the 11% they paid in the late 1990s and a quarter of the 25% they paid in the 1950s.
• As a share of the economy (i.e., of gross domestic product or GDP), overall federal corporate tax collections for fiscal years 2009-2011 fell to 1.16% of GDP, their lowest level since World War II. This is roughly half the level of the 1970s through 2008 and a third of the level of the 1960s.

4.   Stark inequities exist in taxes paid across industries and among companies in the same industry because of special tax breaks and the complexities of our tax policies.

5.   Corporations claim that US firms pay more income tax than their foreign competitors. However, overall, the effective foreign tax rate on the 134 companies with significant foreign profits was 6.1 percentage points higher than their effective U.S. tax rate — almost a third higher. Furthermore, they can “defer” paying U.S. taxes on their foreign profits indefinitely.

Twenty-five years ago, President Ronald Reagan was horrified by a similar epidemic of corporate tax dodging and addressed the problem by eliminating many corporate tax loopholes in 1986. Over time, the results of this effort have been reversed and, ironically, that reversal has been led in large part by politicians who claim to be Reagan’s disciples and to oppose government subsidies that interfere with market incentives.

 Over the years, corporations clearly have, through lobbying and campaign contributions, convinced policy makers to reduce their tax burden. Today, they are lobbying for lower tax rates and an exemption for profits of overseas subsidiaries. However, the report (on page 1) notes that “today corporate tax loopholes are so out of control that most Americans can rightfully complain, ‘I pay more federal income taxes than General Electric, Boeing, DuPont, Wells Fargo, Verizon, etc., etc., all put together.’”

 The evidence indicates that significant numbers of corporations are not paying their fair share of taxes. Requiring them to pay their fair share would not only make our tax system fairer, but also help to reduce the budget deficit.