No Fooling—Corporations Evade Taxes

Forbes finally notices what has been clear for years.

By John Miller

When Forbes magazine, the keeper of the list of the 400 richest Americans, warns that corporations not paying taxes on their profits will raise your hackles, you might wonder about the article’s April 1 dateline. If it turns out not to be an April Fool’s joke, things must be really bad.

And indeed they are. As Forbes reports, General Electric, the third largest U.S. corporation, turned a profit of $10.3 billion in 2010, paid no corporate income taxes, and got a “tax benefit” of $1.1 billion on taxes owed on past profits. And from 2005 to 2009, according to its own filings, GE paid a consolidated tax rate of just 11.6% on its corporate rates, including state, local, and foreign taxes. That’s a far cry from the 35% rate nominally levied on corporate profits above $10 million.

Nor was GE alone among the top ten U.S. corporations with no tax obligations. Bank of America (BofA), the seventh largest U.S. corporation, racked up $4.4 billion in profits in 2010 and also paid no corporate income taxes (or in 2009 for that matter). Like GE, BofA has hauled in a whopping “tax benefit”—$1.9 billion.

For BofA, much like for GE, losses incurred during the financial crisis erased it tax liabilities. BofA, of course, contributed mightily to the crisis. It was one of four banks that controlled 95% of commercial bank derivatives activity, mortgage-based securities that inflated the housing bubble and brought on the crisis.

And when the crisis hit, U.S. taxpayers bailed them out, not once but several times. All told BofA received $45 billion of government money from the Troubled Asset Relief Program (TARP) as well as other government guarantees. And while BofA paid no taxes on their over $4 billion of profits, they nonetheless managed to pay out $3.3 billion in bonuses to corporate executives. All of that has made BofA a prime target for US Uncut protests (see p. 6) against corporate tax dodging that has cost the federal government revenues well beyond the $39 billion saved by the punishing spending cuts in the recent 2011 budget deal.

These two corporate behemoths and other many other major corporations paid no corporate income taxes last year, even though 2010 U.S. corporate profits had returned their level in 2005 in the midst the profits-heavy Bush expansion before the crisis hit.

An Old Story

But why is Forbes suddenly noticing corporate tax evasion? After all, corporations not paying taxes on their profits is an old story. Let’s take a look at the track record of major corporations paying corporate income before the crisis hit and the losses that supposedly explain their not paying taxes.

The Government Accounting Office conducted a detailed study of the burden of the corporate income tax from 1998 to 2005. The results were stunning. Over half (55%) of large U.S. corporations reported no tax liability for at least one of those eight years. And in 2005 alone 25% of those corporations paid no corporate income taxes, even though corporate profits had more than doubled from 2001 to 2005.

In another careful study, the Treasury Department found that from 2000 to 2005, the share of corporate operating surplus that that U.S. corporations pay in taxes—a proxy for the average tax rate—was 16.7% thanks to various corporate loopholes, especially three key mechanisms:

• Accelerated Depreciation: allows corporations to write off machinery and equipment or other assets more quickly than they actually deteriorate.
• Stock Options: by giving their executives the option to buy the company’s stock at a favorable price, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth.
• Debt Financing: offers a lower effective tax rate for corporate investment than equity (or stock) financing because the interest payments on debt (usually incurred by issuing bonds) get added to corporate costs and reduce reported profits.

Corporate income taxes are levied against reported corporate profits, and each of these mechanisms allows corporations to inflate their reported costs and thereby reduce their taxable profits.

And then there are overseas profits. U.S.-based corporations don’t pay U.S. corporate taxes on their foreign income until it is “repatriated,” or sent back to the parent corporation from abroad. That allows multinational corporations to defer payment of U.S. corporate income taxes on their overseas profits indefinitely or repatriate their profits from foreign subsidiaries when their losses from domestic operations can offset those profits and wipe out any tax liability, as GE did in 2010.

Hardly Overtaxed

Nonetheless, Scott Hodge, the president of the right-wing Tax Foundation, steadfastly maintains that U.S. corporations are overtaxed, and that that is what driving U.S. corporations to park their profits abroad (and lower their U.S. taxes). Looking at nominal corporate tax rates, Hodge would seem to have a case. Among the 19 OECD countries, only the statutory corporate tax rates in Japan surpass the (average combined federal and state) 39.3% rate on U.S. corporate profits. And the U.S. rate is well above the OECD average of 27.6%.

But these sorts of comparisons misrepresent where U.S. corporate taxes stand with respect to tax rates actually paid by corporations in other advanced countries. Why? The tax analyst’s answer is that the U.S. corporate income tax has a “narrow base,” or in plain English, is riddled with loopholes. As a result U.S. effective corporate tax rates—the proportion of corporate profits actually paid out in taxes—are not only far lower than the nominal rate but below the effective rates in several other countries. The Congressional Budget Office, for instance, found that U.S. effective corporate tax rates were near the OECD average for equity-financed investments, and below the OECD average for debt-financed investments. And for the years from 2000 to 2005, the Treasury Department found the average corporate tax rate among OECD countries was 21.6%, well above the U.S. 16.7% rate.

Current U.S. corporate tax rates are also extremely low by historical standards. In 1953, government revenue from the U.S. corporate income taxes were the equal of 5.6% of GDP; the figure was 4.0% of GDP in 1969, 2.2% of GDP from 2000 to 2005, and is currently running at about 2.0% of GDP. By all these measures U.S. corporations are hardly over-taxed. And some major corporations are barely taxed, if taxed at all.

Closing corporate loopholes so that corporate income tax revenues in the United States match the 3.4% of GDP collected on average by OECD corporate income taxes would add close to $200 billion to federal government revenues—more than five times the $39 billion of devastating spending cuts just made in the federal budget in 2011. Returning the corporate income tax revenues to the 4.0% of GDP level of four decades ago would add close to $300 billion a year to government revenues.

The cost of not shutting down those corporate loopholes would be to let major corporations go untaxed, to rob the federal government of revenues that could, with enough political will, reverse devastating budget cuts, and to leave the rest of us to pay more and more of the taxes necessary to support a government that does less and less for us.

JOHN MILLER, a member of the Dollars & Sense collective, is a professor of economics at Wheaton College.