During an election year, corporate tax reform is believed to be very effective, given that the U.S. public pays high taxes, while many corporations don’t pay their fair share. It is not that corporations are not handing over a check to the Internal Revenue Service (IRS). The concern is over the many tax loopholes and subsidies corporations have landed due to their lobbying tactics.
In February, the sitting administration released “The President’s Framework for Business Tax Reform.” At first look, this report appears to be a good deal for the American public.
“America’s system of business taxation is in need of reform. The United States has a relatively narrow corporate tax base compared to other countries—a tax base reduced by loopholes, tax expenditures, and tax planning,” the President’s Framework said.
The President’s Framework suggests eliminating tax loopholes and subsidies. But, to sweeten the loss, the report suggests that the corporate tax rate be reduced to 28 percent, which would be comparable to tax rates in other countries.
According to the President’s Framework, the time is ripe to address America’s corporate taxation, following the lead of most of America’s trading partners.
“In recent years, our major trading partners have overhauled their tax codes, lowered their statutory corporate tax rates, and in some cases broadened their tax bases,” the administration’s report said.
Tax experts, analysts, and researchers asked in a number of reports whether this framework is really something that would ultimately put more money into the IRS coffers and help pay down the U.S. total debt or is just another gimmick.
“The corporation lobby has won the fight before it has begun by defining the terms of the debate. … The prime message is that the framework is designed to be ‘revenue neutral,’ budget-speak meaning the corporations will not be asked to pay more to help address America’s large investment and budget deficits,” suggests an article on the Campaign for America’s Future website.
Shifting Tax Burden to America’s Citizens
“These big, profitable corporations are continuing to shift their tax burden onto average Americans. … This isn’t fair to the rest of us, it makes no economic sense,” said Bob McIntyre, director at Citizens for Tax Justice (CTJ), in an April 9 article on the CTJ website.
According to another CTJ article on April 20, Eric Cantor, House Majority leader, suggested in April at a Bank of America event that people whose earnings are so low that they don’t pay federal personal income taxes should be required to pay such taxes.
The CTJ article said that “Cantor’s comments suggest that, like Rep. Ryan [House Budget Committee chairman], he is interested in ending those tax subsidies that benefit the lower-income or middle-income households but not those benefitting [sic] the rich.”
Corporate Tax Payments and Subsidies
CTJ participated in the research of tax payments made by 280 of America’s large Fortune 500 corporations during the 2008–2010 and 2008–2011 tax seasons. Thirty companies paid no taxes during 2008–2010. During the 2008–2011 tax period, DuPont Co. paid a 10.9 percent effective tax rate and Wells Fargo & Co. paid a 3.8 percent effective tax rate.
Due to subsidies, Pepco Holdings Inc. received the highest tax break during the 2008–2010 and 2008–2011 tax seasons, -57.6 percent and -39.5 percent respectively, followed by General Electric Co. (GE) with a tax rate of -45.3 percent and -18.9 percent respectively.
During the 2008–2011 tax season, Wells Fargo & Co. garnered the largest subsidy at $21.6 billion, followed by GE with a $10.6 billion subsidy, despite an income of $19.6 billion. Verizon Communications Inc.’s subsidy was $7.7 billion, despite an income of $19.8 billion. The Boeing Co. received a subsidy of $6 billion, despite $14.8 billion in profit. The subsidies for the remaining 26 corporations were below $3.5 billion.
The company with the highest federal tax break (-39.5 percent), Pepco Holdings, was among the 14 companies that received a subsidy below $1 billion ($941 million). The company with the lowest subsidy ($171 million) was Con-way Inc.
Over the four-year period of 2008–2011, the IRS would have received an additional $78.3 billion in federal income taxes if those 30 companies had paid their fair share, according to CTJ’s research.
“The Treasury Department reports that corporate taxes fell to only 1.2 percent of our gross domestic product over the past three fiscal years. That’s lower than at any time since the 1940s except for one single year during President Reagan’s first term. By comparison, corporate taxes averaged almost 4 percent of our GDP during the 1960s,” CTJ said.
Truth About the U.S. Corporate Tax Rate
“America has one of the lowest corporate income taxes of any developed country, but you wouldn’t know it given the hysteria of corporate lobbying outfits like the Business Roundtable,” according to an April 5 article on the CTJ website.
Gallup Poll surveys conducted between 2004 and 2011 suggest that the majority of survey respondents believe that corporations are getting away with paying too little taxes.
Of the 280 companies studied by CTJ, 134 companies earned a large portion of their income in foreign countries. The majority of these companies (87) were taxed at a lower rate on their U.S. earnings than they paid in taxes on their earnings in foreign countries.
According to CTJ, corporations employ a number of accounting gimmicks to make it look like their earnings in the United States come from their subsidiaries located in tax havens, although most of the time, these so-called companies are no more than a post office box.
“The problem that corporations are complaining about is actually the high taxes they pay to foreign governments, how could Congress possibly provide any remedy for that? Clearly, what corporations pay in U.S. taxes is what’s relevant to the corporate tax debate before Congress,” the CTJ article said.
Keeping Up the Hype About Corporate Taxes
“Overall, financial executives from both large and small businesses view an effective tax rate of 20–25 percent as necessary to make the U.S. federal corporate rate competitive with global tax rates,” according to a recent article by Alvarez & Marsal Taxand LLC (A&M Taxand), a tax advisory firm.
Executives surveyed for the A&M Taxand article said that they were more concerned about tax code changes than the actual tax expenses. But, they did state that a lowered tax rate would make our U.S. tax rate more competitive with other countries. The article did not address the subsidies companies received, which lowered the U.S. tax rate below that of foreign countries.
“Most CFOs believe that the U.S. has stood idle for 20 years while other countries have lowered their top corporate tax rates,” said Ernesto R. Perez, director at A&M Taxand.On the other hand, CTJ does not agree with the executives A&M Taxand surveyed, stating in the April 5 article that “large, profitable U.S. corporations only pay about half of the 35 percent corporate tax rate on average, and most U.S. multinational corporations actually pay higher taxes in other countries.”
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