WASHINGTON – The Government Accountability Office found that major U.S. companies aren’t making tax payments that amount to anything close to the 35 percent statutory corporate rate, considered the highest in the world.
According to the GAO, profitable U.S. corporations with at least $10 million in assets paid an average effective federal tax rate of 12.6 percent, just a bit more than one-third of the statutory rate, as a result of various deductions and protections found in the Internal Revenue Service code. Multinational corporations paid an effective rate of about 16.9 percent when state, local and foreign taxes were taken into account.
Tax reformers, including President Obama, have consistently called for a lowering of the 35 percent rate, citing it as contributing to a sluggish economy. But the GAO may give new impetus to efforts to enhance corporate tax deposits into the federal Treasury.
Corporate tax contributions have fallen steadily over the years, from 32 percent of federal tax revenues in the 1950s to 9 percent today. At the same time U.S. corporate profits have reached an all-time high. Despite corporations’ growing share of income, GAO reported that in 2012 corporate income taxes contributed only about $242 billion to federal tax receipts, while individual income taxes contributed nearly five times more at $1.1 trillion.
In a 2008 report, the GAO determined that nearly 55 percent of all large U.S firms reported no federal tax liability in at least one year between 1998 and 2005.
Sen. Carl Levin (D-Mich.), former chairman of the Senate Permanent Subcommittee on Investigations, who requested the report along with Sen. Tom Coburn (R-Okla.), said the report confirms suspicions that large U.S. corporations as a whole aren’t paying their fair share in taxes. Profitable companies, he noted, are paying taxes at a rate lower that the rate paid by teachers, firefighters and other workers.
“When some U.S. corporations use unjustifiable loopholes and offshore gimmicks to avoid paying Uncle Sam, their tax burden is shifted onto hardworking American families and small business,” Levin said.
Coburn said the report “underscores the need for comprehensive tax reform,” adding that the Treasury would benefit from lower rates for both individuals and corporations and the elimination of “loopholes” afforded big business.
“When some U.S. corporations use unjustifiable loopholes and offshore gimmicks to avoid paying Uncle Sam, their tax burden is shifted onto hardworking American families and small business,” he said. Creating giveaways and loopholes for corporations, he said, “is both anti-competitive and unfair to working families.”
Last May, the Subcommittee on Investigations conducted a hearing on Apple Inc., the giant technology firm based in Cupertino, Calif. The panel determined that Apple, using Ireland as a tax haven, has avoided paying taxes on $44 billion in income over the past four years. Timothy Cook, the company’s chief executive officer, said every technique utilized by Apple was legal and above board.
The committee found that various practices have allowed U.S.-based multinational corporations, like Apple, to amass an estimated $1.9 trillion in profits in offshore tax havens shielded from U.S. taxes. One study has estimated that offshore earnings stockpiled by Standard & Poor’s 500 companies using these strategies have increased 400 percent in the last decade.
Another study found that 30 of the largest U.S. multinationals, with more than $160 billion in profits, paid nothing in federal income taxes over a recent three-year period using multiple offshore loopholes that give them significant control over how much U.S. income they will report and, therefore, how much tax, if any, they will pay.
“The revenue lost to tax base erosion and profit shifting is hard to estimate, but there is compelling evidence the amount lost is substantial,” said Stephen E. Shay, a law professor at Harvard University. “This revenue loss exacerbates the deficit and undermines public confidence in the tax system. Restoring revenue lost to base erosion and profit shifting would support investing in job-creating growth in the short term and reducing the deficit over the long term.”
Sen. John McCain (R-Ariz.), a member of the committee, said U.S. corporations cannot continue to avoid paying their appropriate share in taxes given the massive budget cuts under sequestration.
“Our military cannot afford it,” he said. “Our economy cannot endure it. And the American people will not tolerate it.”
The federal tax system, McCain said, is “broken and uncompetitive, and I have long supported efforts to modernize it.”
“The general American public should not have to make up the balance as corporations avoid paying billions in U.S. taxes,” he said. “The egregious loopholes that exist in the tax code must be closed so that the nearly $1 trillion in untaxed overseas profits can come back to the United States. It is past time for American corporations like Apple to reorganize their tax strategies, to pay what they should, and invest again in the American economy.”
William McBride, chief economist at the Tax Foundation, a corporate-backed think tank, disputed much of the GAO’s findings, noting that the study fails to take into account a tax credit granted to U.S. companies for foreign corporate tax payments to prevent double taxation of foreign income. When the foreign tax credit is accounted for and foreign corporate taxes are counted, he said, the overall effective corporate tax rate on the worldwide income of U.S. corporations is about 32 to 33 percent.
McBride also said the GAO was comparing “apples and oranges,” equating taxable income with financial statement income, which almost always is a much larger figure, thus crediting the companies with more taxable income than they actually held.
The GAO report is the result of a year-long study using data for the tax years 2008 to 2010 and is consistent with other studies demonstrating that large, profitable corporations are often able to minimize, if not entirely avoid, paying U.S. income taxes. A 2012 study by Citizens for Tax Justice found that, over a recent three year period, 30 of the largest U.S. multinationals, with more than $160 billion in profits, paid no federal income taxes at all.
“Some U.S. multinational corporations like to complain about the U.S. 35 percent statutory tax rate but what they don’t like to admit is that hardly any of them pay anything close to it,” Levin said.
When Congress debates tax reform, Levin said, closing 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.”