Profitable corporations are supposed to pay a 35 percent federal income tax rate on their U.S. profits. But many corporations pay far less, or nothing at all, because of the many tax loopholes and special breaks they enjoy. A new report by Citizens for Tax Justice documents just how successful many Fortune 500 corporations have been at using these loopholes and special breaks over the past five years.
Conservatives and Tea Partiers constantly bemoan “Obama’s Socialist Welfare State” and cut unemployment benefits, food stamps, fuel assistance, education and other programs that benefit our neediest citizens in an effort to reduce the Federal deficit and the national debt. Simultaneously they turn a blind eye to the true beneficiaries of government largess – the biggest and most profitable corporations.
“Corporate lobbyists incessantly claim that our corporate tax rate is too high, and that it’s not ‘competitive’ with the rest of the world,” said Robert McIntyre, Director of Citizens for Tax Justice and the report’s lead author. “Our new report shows that both of these claims are false. Most of the biggest companies aren’t paying anywhere near 35 percent of their profits in taxes and far too many aren’t paying U.S. taxes at all. Most multinationals are paying lower tax rates here in the United States than they pay on their foreign operations.”
The report looks at the profits and U.S. federal income taxes of the 288 Fortune 500 companies that have been consistently profitable in each of the five years between 2008 and 2012, excluding companies that experienced even one unprofitable year during this period
Among the report's findings:
• As a group, the 288 corporations examined paid an effective federal income tax rate of just 19.4 percent over the five-year period — far less than the statutory 35 percent tax rate.
• Twenty-six of the corporations, including Boeing, General Electric, Priceline.com and Verizon, paid no federal income tax at all over the five year period. A third of the corporations (93) paid an effective tax rate of less than ten percent over that period.
• Of those corporations in our sample with significant offshore profits, two thirds paid higher corporate tax rates to foreign governments where they operate than they paid in the U.S. on their U.S. profits.
• One hundred and eleven of the 288 companies (39 percent of them) paid zero or less in federal income taxes in at least one year from 2008 to 2012.
• The sectors with the lowest effective corporate tax rates over the five-year period were utilities (2.9 percent), industrial machinery (4.3 percent), telecommunications (9.8 percent), oil, gas and pipelines (14.4 percent), transportation (16.4 percent), aerospace and defense (16.7 percent) and financial (18.8 percent).
• The tax breaks claimed by these companies are highly concentrated in the hands of a few very large corporations. Just 25 companies claimed $174 billion in tax breaks over the five years between 2008 and 2012. That’s almost half the $364 billion in tax subsidies claimed by all of the 288 companies in our sample.
• Five companies — Wells Fargo, AT&T, IBM, General Electric, and Verizon — enjoyed over $77 billion in tax breaks during this five-year period.
How big is the “Welfare” bite taken out of the Federal budget by these “Takers”?
Over the 2008-12 period, the 288 companies earned more than $2.3 trillion in pretax profits in the United States. Had all of those profits been reported to the IRS and taxed at the statutory 35 percent corporate tax rate, then the 288 companies would have paid $816 billion in income taxes over the five years. But instead, the companies as a group paid just more than half of that amount. The enormous amount they did not pay was due to hundreds of billions of dollars in tax subsidies that they enjoyed.
• Tax subsidies for the 288 companies over the five years totaled a staggering $364 billion, including $56 billion in 2008, $70 billion in 2009, $80 billion in 2010, $87 billion in 2011, and $70 billion in 2012. These amounts are the difference between what the companies would have paid if their tax bills equaled 35 percent of their profits and what they actually paid.
• Almost half of the total tax-subsidy dollars over the five years — $173.7 billion — went to just 25 companies, each with more than $3.7 billion in tax subsidies.
• Wells Fargo topped the list of corporate tax-subsidy recipients, with nearly $21.6 billion in tax subsidies over the five years.
• Other top tax subsidy recipients included AT&T ($19.2 billion), IBM ($13.2 billion), General Electric ($12.7 billion), Verizon ($11.1 billion), Exxon Mobil ($8.7 billion), and Boeing ($7.4 billion).
The Historical Perspective
How do the results for 2008 to 2012 compare to corporate tax rates in earlier years? The answer illustrates how corporations have managed to get around some of the corporate tax reforms enacted back in 1986, and how tax avoidance has surged with the help of our political leaders.
By 1986, President Ronald Reagan fully repudiated his earlier policy of showering tax breaks on corporations. Reagan’s Tax Reform Act of 1986 closed tens of billions of dollars in corporate loopholes, so that by 1988, our survey of large corporations (published in 1989) found that the overall effective corporate tax rate was up to 26.5 percent, compared to only 14.1 percent in 1981-83. That improvement occurred even though the statutory corporate tax rate was cut from 46 percent to 34 percent as part of the 1986 reforms.
In the 1990s, however, many corporations began to find ways around the 1986 reforms, abetted by changes in the tax laws as well as by tax-avoidance schemes devised by major accounting firms. As a result, in Citizens for Tax Justice's 1996-98 survey of 250 companies, it was found that their average effective corporate tax rate had fallen to only 21.7 percent. Their September 2004 study found that corporate tax cuts adopted in 2002 had driven the effective rate down to only 17.2 percent in 2002 and 2003. The five-year average rate found in the current study is only slightly higher, at 19.4 percent.
As a share of GDP, overall federal corporate tax collections in fiscal 2002 and 2003 fell to only 1.24 percent. At the time, that was their lowest sustained level as a share of the economy since World War II. Corporate taxes as a share of GDP recovered somewhat in the mid 2000s after the 2002-enacted tax breaks expired, averaging 2.3 percent of GDP from fiscal 2004 through fiscal 2008. But over the past five fiscal years (2009-13), total corporate income tax payments fell back to only 1.39 percent of the GDP.
Corporate taxes paid for more than a quarter of federal outlays in the 1950s and a fifth in the 1960s. They began to decline during the Nixon administration, yet even by the second half of the 1990s, corporate taxes still covered 11 percent of the cost of federal programs. But in fiscal 2012, corporate taxes paid for a mere 7 percent of the federal government’s expenses.
In this context, it seems odd that anyone would insist that corporate tax reform should be “revenue neutral.” If we are going to get our nation’s fiscal house back in order, increasing corporate income tax revenues should play an important role.
U.S. Corporate Income Taxes VS. Foreign Corporate Income Taxes
Corporate lobbyists relentlessly tell Congress that companies need tax subsidies from the government to be successful. They promise more jobs if they get the subsidies, and threaten economic harm if they are denied them. A central claim in the lobbyists’ arsenal is the assertion that their clients need still more tax subsidies to “compete” because U.S. corporate taxes are allegedly much higher than foreign corporate taxes. But the figures that most of these corporations report to their shareholders indicate the exact opposite, that they pay higher corporate income taxes in the other countries where they do business than they pay here in the U.S.
• About two-thirds (66 percent) of these U.S. companies paid higher foreign tax rates on their foreign profits than they paid in U.S. taxes on their U.S. profits.
• Overall, the effective foreign tax rate on the 125 companies was 2.7 percentage points higher than their U.S. effective tax rate.
How do these figures square with the well-known practice of corporations shifting their profits to countries like the Cayman Islands where they are not taxed at all? The figures here show what corporations report to their shareholders as U.S. profits and foreign profits, and therefore are likely to reflect profits genuinely earned in the U.S. and those genuinely earned offshore, respectively. But many of these corporations are likely to report something very different to the IRS by using various legal but arcane accounting maneuvers. Some of the profits correctly reported to shareholders as U.S. profits are likely to be reported to the IRS as profits earned in tax-haven countries like Bermuda or the Cayman Islands, where they are not taxed at all. Indeed, this partly explains the low effective U.S. income tax rates that many corporations enjoy. This “profit-shifting” problem will exist so long as our tax laws allow corporations to “defer” paying U.S. taxes on their “offshore” profits, providing an incentive to make U.S. profits appear to be earned in offshore tax havens.
The figures make clear that most American corporations are paying higher taxes in other countries where they engage in real business activities than they pay in U.S. taxes on their true U.S. profits.
One might note that paying higher foreign taxes to do business in foreign countries rather than in the United States has not stopped American corporations from shifting operations and jobs overseas over the past several decades. But this is just more evidence that corporate income tax levels are usually not a significant determinant of what companies do. Instead, companies have shifted jobs overseas for a variety of non-tax reasons, such as low wages and weaker labor and environmental regulations in some countries, a desire to serve growing foreign markets, and the development of vastly cheaper costs for shipping goods from one country to another than used to be the case.
Who loses out supporting the “Corporate Welfare Queens”?
The general public. As a share of the economy, corporate tax payments have fallen dramatically over the last quarter century. So one obvious group of losers from growing corporate tax avoidance is the general public, which has to pay more for — and/or get less in — public services, or else face mounting national debt burdens that must be paid for in the future.
Disadvantaged companies. Almost as obvious is how the wide variation in tax rates among industries, and among companies within particular industries, gives relatively high-tax companies and industries a legitimate complaint that federal tax policy is helping their competitors at their expense.
• Honeywell International and Deere both produce industrial machinery. But over the 2008-12 period, Deere paid 29.8 percent of its profits in U.S. corporate income taxes, while Honeywell paid a tax rate of only 7.5 percent.
• Aerospace giant Boeing paid a five-year federal tax rate of –1.0 percent, while competitor General Dynamics paid 29.0 percent.
• Household products maker Kimberly-Clark paid a five-year rate of 13.9 percent, while competitor Clorox paid 28.6 percent.
• Pharmaceutical firm Baxter International paid just 5.6 percent of its five year U.S. profits in federal income taxes, while Becton Dickinson paid 23.5 percent.
• Time Warner Cable paid 3.9 percent over five years, while its competitor Comcast paid 24.0 percent.
The U.S. economy. Besides being unfair, the fact that the government is offering much larger tax subsidies to some companies and industries than others is also poor economic policy. Such a system artificially boosts the rate of return for tax-favored industries and companies and reduces the rate of return for those industries and companies that are less favored. To be sure, companies that push for tax breaks argue that the “incentives” will encourage useful activities. But the idea that the government should tell businesses what kinds of investments to make conflicts with our basic economic philosophy that consumer demand and free markets should be the test of which private investments make sense.
To be sure, most of the time, tax breaks don’t have much effect on business behavior. After all, companies don’t lobby to have the government tell them what to do. Why would they? Instead, they ask for subsidies to reward them for doing what they would do anyway. Thus, to a large degree, corporate tax subsidies are simply an economically useless waste of resources.
Indeed, corporate executives (as opposed to their lobbyists) often insist that tax subsidies are not the basis for their investment decisions. Other things, they say, usually matter much more, including demand for their products, production costs and so forth.
But not all corporate tax subsidies are merely useless waste. Making some kinds of investments more profitable than others through tax breaks will sometimes shift capital away from what’s most economically beneficial and into lower-yield activities. As a result, the flow of capital is diverted in favor of those industries that have been most aggressive in the political marketplace of Washington, D.C., at the expense of long-term economic growth.
State governments and state taxpayers. The loopholes that reduce federal corporate income taxes cut state corporate income taxes, too, since state corporate tax systems generally take federal taxable income as their starting point in computing taxable corporate profits.Thus, when the federal government allows corporations to write off their machinery faster than it wears out or to shift U.S. profits overseas or to shelter earnings from oil drilling, most states automatically do so, too. It’s a mathematical truism that low and declining state revenues from corporate income taxes means higher state taxes on other state taxpayers or diminished state and local public services.
The integrity of the tax system and public trust therein. Ordinary taxpayers have a right to be suspicious and even outraged about a tax code that seems so tilted toward politically well-connected companies. In a tax system that by necessity must rely heavily on the voluntary compliance of tens of millions of honest taxpayers, maintaining public trust is essential — and that trust is endangered by the specter of widespread corporate tax avoidance. The fact that the law allows America’s biggest companies to shelter almost half of their U.S. profits from tax, while ordinary wage earners have to report every penny of their earnings, has to undermine public respect for the tax system.