You might have heard how the U.S. has just become "number one" in corporate taxation. The campaign to make this event news was led by the Business Roundtable, an association of CEOs that advocates for a lower corporate rate and a more "competitive" tax system. They cleverly used the day that Japan lowered its corporate tax rate by a few percentage points as an opportunity to complain, anew, about the U.S. corporate tax rate, which, as of Sunday, became the highest in the developed world.
But it's the highest on paper only. In practice, the true U.S. corporate tax rate is barely half of the 35 percent nominal rate. A major study by Citizens for Tax Justice last November found that the biggest and most profitable Fortune 500 corporations paid only 18.5 per percent in federal income taxes on their U.S. profits from 2008 through 2010. Many companies paid little or nothing.
Let's take some examples. The Business Roundtable's executive committee is chaired by Boeing CEO, James McNerney. Over the last 10 years, Boeing has only paid federal income taxes in two years (in 2002 and 2007) and has gotten tax refunds from the U.S. Treasury all the others. Boeing's average federal tax rate in the last decade? Negative 6.5 percent.
GE's Jeffery Immelt is also on that executive committee. His corporation famously paid no taxes last year and, in the last ten years, has averaged a federal income tax rate of 2.3 percent on its $83 billion in U.S. profits.
It wasn't always this way. Back in the prosperous 1960s, corporate taxes averaged almost 4 percent of our gross domestic product. But over the past three fiscal years, federal corporate income taxes plummeted to only 1.2 percent of GDP. That's the lowest sustained share in seven decades.
Confronted by this data, corporations often point to their worldwide tax bills, which combine U.S. profits and taxes with foreign profits and taxes. But that's mixing apples and oranges. In fact, if you look into the foreign taxes paid by U.S. companies, you'll make an interesting discovery. Despite the common corporate claims that U.S. taxes are higher than taxes in other developed countries, it turns out that most U.S. multi-national corporations are actually paying higher taxes to foreign governments on the profits they earn there than they pay to the U.S. on the profits they earn here.
The reason for the extraordinarily low U.S. corporate tax payments, of course, is that our corporate tax code is riddled with loopholes and tax breaks, most of them indefensible. These include rules that let companies shift their profits, on paper, to low-tax foreign tax havens, and thereby avoid their U.S. tax responsibilities. The price tag for these subsidies is slated to approach $2 trillion over the next 10 years.
Given their huge cost, you might think that eliminating corporate tax subsidies would be high on the list among the ways we could cut our nation's long-term budget deficits. And in fact, the American general public does think so. But such is the power of corporate money and corporate lobbying in our nation's capital that every Republican presidential candidate and virtually every GOP member of Congress thinks we need to reduce corporate tax payments even further. And some Democrats in Congress feel the same way. Another recent CTJ study found that 98 percent of sitting members of Congress have accepted campaign money from the thirty most notorious tax avoiding companies.
There's a price to pay for letting the corporate income tax dwindle. It inevitably means higher taxes or reduced public services (or both) for the rest of us. This simple arithmetic isn't just a theory. Japan may be shaving a few points off its corporate tax rate, but it not only coupled that with curbs on corporate loopholes, but also added a new surtax on personal income taxes.
Getting rid of useless or harmful corporate tax breaks ought to appeal to anyone who believes in free markets. As a bonus, it would make it much easier to fund the investments we need to improve education and repair our crumbling roads and bridges -- things that would actually help businesses and our economy grow.
Robert McIntyre is Director of Citizens for Tax Justice and the Institute on Taxation and Economic Policy. His research on corporate and individual taxation has been shaping policy for 30 years.
TAX RATES
Tax rates matter at the margins. When businesses evaluate investment options they look at the after tax return of a million $ investment. If this extra income will be taxed at 30% regardless of other deductions they use the 30% to determine if the investment is a good idea.
INCOME TAX
The left does the same thing on income tax the author is accusing the right of when looking at corporate taxes. They look back at a time when tax rates where higher ignoring the fact that no one paid the 90% tax rate.
REDUCE THE DEFICIT
The US deficit needs to be reduced. Looking at different policies in Latin America and the answer is clear. Reducing spending reduces deficits, increasing taxes encourages continued spending by politicians and results in eventual bankruptcy.
Conservative Solution:We must reduce taxes for corporations to negative infinity, end all regulations, and give tax breaks to the job creators.
This raises the questions:
Why are they operating there rather than in the U.S. where the business would actually pay less tax?
Are foreign countries more profitable places to do business despite their higher taxes?
This would greatly simplify the tax law as US based companies would pay immediate tax on their worldwide profits. Makes things simple but of course Congress will never let their corporate friends down and raise their worldwide tax rate to 25%!!!
The benefits of doing business in the US should be reserved for businesses that are actually doing business in the US, including foreign-based companies, and excluding US-in-name-only companies.
A few points:
a) True not many companies pay the statutory rate but very few countries pay the statutory rate in other countries either, even our effective rates put us near the top, with an effective rate of about 27%, 31% once you average in state taxes.
b) Yeah…I get it….you are a bit unhappy that companies are using their CFL (carried forward losses, a common accounting practice to ensure that companies are able to smooth out losses and not be forced into bankruptcy on a regular basis) to offset profit taxes in the wake of the largest economic disaster in 80 years. Unfortunately, the losses and 2007 and 2008 and the CFL that will be employed over the next few years are not sufficient reason to claim that our corporations are not unfairly taxed, relative to other countries.
d) You point to the halcyon days of 1960 and claim that corporations paid 4% of GDP in taxes back then, you neglected to mention that the structure of taxes has changed since then, with corporate payroll taxes being broken out as a separate tax to corporate tax, all in the pay about the same. As simply demonstrated in the below link:
http://politicalcalculations.blogspot.com/2011/06/corporate-income-and-payroll-taxes-1960.html
e) If you think the US tax code is competitive, you are highly mistake. Ontario has a nominal corporate tax of 15%, the effective tax is even lower. They have just overtaken Michigan as auto capitol of the world….good solid benefit paying auto jobs. Those jobs are there because we have encouraged our businesses to move them there.
Kai