"According to the Internal Revenue Service, corporations had gross profits of $1.8 trillion in 2007 and taxable income of $1.2 trillion"

Effective Corporate Tax Rates

THE NEW YORK TIMES

By BRUCE BARTLETT

Nov  26, 2013

Although the prospects for tax reform in Congress have dimmed of late, the lobbying activity has not. The corporate community continues to put pressure on Congress to reduce the statutory corporate tax rate, which, at 39.1 percent including state and local taxes, is the highest among members of the Organization for Economic Cooperation and Development.

According to the Internal Revenue Service, corporations had gross profits of $1.8 trillion in 2007 and taxable income of $1.2 trillion. Since the Tax Reform Act of 1986, new corporate tax preferences have widened the gap between gross income and taxable income. In 1987, gross corporate profits reported on tax returns were $328 billion and taxable income was $312 billion. Thus since 1987, taxable income has fallen to 68 percent from 95 percent of gross income.What tends to get lost in the debate is how much corporations actually pay in taxes once various deductions and credits are taken into account. A corporation’s total tax bill divided by its profits is its effective tax rate. It’s hard to imagine a corporation paying anywhere close to 39 percent of all its profits in taxes, as that would mean it has no deductions or credits whatsoever.

Of course, many corporations are so adept at manipulating the tax code that they pay no federal taxes at all. According to Citizens for Tax Justice, a progressive group, 78 companies paid no federal income taxes at least one year between 2008 and 2010. The data come from annual company reports and may not necessarily reflect actual tax payments on tax returns because of different accounting concepts.

Earlier this year, the Government Accountability Office, a federal agency,examined corporate tax returns to determine the taxes corporations actually pay. It found that in 2010, profitable corporations based in the United States had an effective federal tax rate of 13 percent on their worldwide income, 17 percent including state and local taxes.

The following chart shows corporate profits as a share of the gross domestic product. As one can see, 2010 was a good year, with profits very close to their pre-recession level and about a third higher than the boom years of the 1990s. Since 2010, profits have increased by another percentage point of G.D.P.

Federal Reserve Bank of St. LouisShaded areas indicate recessions in the United States.

But aggregate corporate taxes in 2010 were low, just 1.3 percent of G.D.P., because corporations can carry forward losses from previous years to offset taxes in future years. Since many corporations had huge losses in 2008 and 2009, because of the economic recession, this reduced their tax liability in 2010 below the long-term trend of about 2 percent of G.D.P.
The corporate community was upset by the G.A.O. study because it undercut its campaign to cut the corporate tax rate. On Oct. 26, Andrew B. Lyon, a PricewaterhouseCoopers economist who served as deputy assistant secretary of the Treasury for tax analysis during the George W. Bush administration,published a study criticizing the G.A.O. analysis. (The study was posted on the website of an organization, the Alliance for Competitive Taxation, that represents many of the largest and most profitable companies in America andlobbies to cut the federal corporate tax rate to 25 percent from 35 percent.)

Mr. Lyon’s study found that the G.A.O. had understated the corporate tax burden by focusing on a single anomalous year, excluding foreign taxes paid and not including companies that had losses; the G.A.O. study looked only at profitable corporations. His estimate put the effective corporate tax rate at 36.2 percent – above the statutory rate.

The exclusion of foreign taxes is not significant, because American companies get a 100 percent credit for all foreign taxes paid against their tax liability in the United States. Including companies with losses raises the aggregate effective tax rate by reducing aggregate profits. Thus the losses of those that paid no taxes are in effect attributed to profitable companies, making their tax burden appear higher by shrinking their measured profits while their taxes are unchanged.

The independent economist Martin A. Sullivan concluded that the truth is somewhere in between, with the effective corporate tax rate in the mid to upper 20 percent range. In the Nov. 25 issue of Tax Notes magazine, the G.A.O. economists who conducted the original study acknowledged that averaging their results over several years and including foreign taxes, as Mr. Lyon did, would raise the effective tax rate to 22.9 percent. The remaining difference between their study and the Lyon study results from the inclusion of companies with losses.

The debate is highly technical, involving accounting concepts on which there is legitimate discussion. There is also a data problem, because corporate tax returns are private, just as individual returns are. But some analysts, such as the Reuters columnist Felix Salmon, assert that public corporations ought to be required to make their returns available because they contain information that investors have a legitimate right to have. It might also shame a few of the more aggressive corporate tax avoiders into being a little less aggressive.

A key element of the debate over cutting the corporate tax rate is how the United States compares with other countries when corporations decide where to invest and realize profits for tax purposes. Under American law, multinational corporations based in the United States are not taxed on profits earned in foreign countries until those profits are repatriated to the United States. It is estimated that upward of $2 trillion in profits are in effect sitting abroad, unavailable either to shareholders as dividends or to be taxed by the Treasury.

On Nov. 19, Senator Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, released a proposed reform of international corporate taxation. It would tax foreign profits as earned and end deferral. Previously deferred profits would be subject to a 20 percent tax rate. Writing in The New York Times, Victor Fleischer, a professor at the University of San Diego law school, saw merit in the Baucus plan but noted that it differs sharply from one previously put forward by Representative Dave Camp, Republican of Michigan and chairman of the House Ways and Means Committee.

The path to corporate tax reform is not yet clear, but it’s useful to have two substantive proposals on the table. Regardless of how the effective corporate tax rate is calculated, it’s a bad idea to encourage companies to hold their profits abroad simply because the tax code makes it lucrative to do so.