Wednesday, April 11, 2012
U.S. Corporate Tax Rate Quite Deceiving
Much has been made of the fact that, at 35 percent, the U.S. has the highest marginal corporate tax rate in the developed world.
However, to fully understand this story you have to read between the lines and look past the political posturing.
Few U.S. corporations actually pay the 35 percent rate because the loophole-riddled tax code gives them a lower "effective" rate.
The effective corporate income-tax rate — what corporations actually pay after all deductions, credits, and loopholes — is 27.7%.
The tax code has not been thoroughly overhauled in 25 years, and it is in desperate need of fixing. Corporate lobbyists worked hard at putting all those loopholes in place, and they are determined to keep them there.
However, due to a shrunken tax base, a signifiant revision may be on the way.
In February, President Obama proposed a corporate tax reform blueprint that included a 28 percent top rate. Such an idea seems like one that Republicans would love, and it provides an opportunity for genuine consensus and true bipartisanship.
The problems with the tax code are egregious, and they are robbing the Treasury of much needed revenue.
In 2010 the federal government brought in $2.16 trillion in revenue — down from $2.56 trillion in 2007 — putting revenue at a 60-year low.
Much of that is due to the effects of the Great Recession. But corporations are also taking advantage of the tax code and paying lower rates than most individual taxpayers, or avoiding taxes altogether.
Of the 30 companies in the Dow Jones industrial average, 19 told shareholders their effective rate for their 2011 fiscal years (most of which ended on December 31) was below Obama's proposed new tax rate, according to a Reuters analysis of securities filings.
Verizon, for example, paid an effective rate of just 2.7 percent. Even more remarkable, AT&T, Bank of America and Travelers Insurance actually posted a tax gain.
From 2007 to 2009, accounting tricks helped lower Pfizer's average tax rate to 17 percent; Merck to 12.5 percent, and GE to just 3.6 percent.
Those relaxed rates are well below the rates paid in other industrialized nations.
The average 2012 corporate tax rate for the 34 developed countries is 25.4 percent, according to the Organization for Economic Co-operation and Development. The Obama plan would put the U.S. just above that average.
The key to reform is to fully eliminate all deductions, exemptions and loopholes. The code must create a level playing field that is fair, straightforward and incorruptible. Presently, U.S. corporations are making a mockery of the tax code.
A 2008 report by the Government Accountability Office (GAO) found that approximately two-thirds of all corporations paid no federal income tax in 2005. However, it was part of a longer trend.
The GAO — the investigative arm of Congress — also found that two out of three US corporations paid no federal income taxes from 1998 through 2005. The study covered 1.3 million corporations of all sizes, with a collective $2.5 trillion in sales. It also included foreign corporations that do business in the U.S.
The Wall Street Journal reported that 69 percent of U.S. corporations were organized as nontaxable businesses in 2008, up from 24 percent in 1986.
Last year, 30 of the biggest corporations spent more on lobbying than taxes. How crazy is that?
Corporations have gamed the system in their favor. So assertions about how punitive and restrictive the corporate tax code is are plainly absurd.
A government report shows that last year total corporate federal taxes paid fell to 12.1 percent of profits — a level not seen since 1972.
Things weren't always this way. In the 1950s, US corporations contributed a 30 percent share to the federal tax base. Today it's down to 6.6 percent.
Corporations paid a higher share of revenues in the past and the economy was a whole lot healthier.
Revenue from corporate income taxes was between 5 percent and 6 percent of gross domestic product back in the early 1950s.
However, federal corporate tax collections made up only 1.3 percent of U.S. GDP in 2010, down from 2.7 percent in 2006.
The lobbyists did what they were paid to do, and they did a really good job. Congress, ever the loyal servants to their corporate masters and benefactors, did what was asked of them and rigged the tax code.
The consumer group Citizens for Tax Justice said it surveyed major U.S. companies and found that 26 on average paid no net federal income taxes between 2008 and 2011, among them General Electric and Duke Energy.
This nation is essentially broke. In Fiscal 2011, the U.S. government borrowed roughly 36 cents for every dollar spent. Fiscally, the country is teetering on the edge of a cliff. The government simply cannot allow huge, profitable corporations to continue paying zero taxes or, worse, post tax gains.
It's also time for corporations and their Congressional cronies to drop the act; they are not burdened by high or punitive taxes. Quite the contrary. Further, U.S. corporations are fortunate to be subject to the rule of law and all of the protections that this allows.
If the tax code is rewritten, it would benefit the corporations that don't get the special sanctions and the generous tax benefits. Ultimately, the playing field should be leveled and made equal for all.
Moreover, the tax code doesn't need to be rewritten for the benefit of corporations; it needs to be rewritten for the benefit of the rest of the nation. More revenue is desperately needed by the Treasury, which is presently being swindled by corporations.