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Morning Feature – Corporate Taxes: A Citizen’s View

January 8, 2013

Morning Feature

Morning Feature – Corporate Taxes: A Citizen’s View

Tax reform thus far has addressed individuals and small businesses. Large corporations’ taxes have not received much attention as part of deficit reduction or raising new revenues. (More)

The 2010 tax code is 71,684 pages. We should not be bamboozled by complexity and let the biggest corporations off the hook. Some completely off the hook. The ins and outs of corporate taxes keep lots of tax attorneys and CPA’s fully employed. I am neither a tax attorney or a CPA. I am simply curious when tax reform will address the taxes of big businesses. If corporate tax revenue is down, either the middle class will pick up the difference and/or the safety nets will shrink and/or the deficit will grow.

Tax Rates vs. Taxes Paid

There is a difference between tax rates which have Republicans howling as being too high and actual taxes paid. Forbes states it very clearly:

With so much attention focused on whether 2013 will bring tax increases to the rich (it will) and small businesses (it won’t), the corporate tax system, as broken as any in our 70,000 page Internal Revenue Code, goes unnoticed…

The need for corporate tax overhaul was the one item President Obama and Mitt Romney agreed upon, as they both recognized that the combination of a high tax rate and a narrow tax base has left U.S. corporations struggling to compete on an unbalanced international playing field.

The ideal corporate tax system, most would agree, would be defined by three key characteristics:

1. Has a low maximum tax rate,

2. Contains limited deductions and preferences,

3. Is fairly simple for corporations to implement and for the IRS to monitor.

Needless to say, this is NOT our current system. At the moment, U.S. corporations are subject to a maximum 35% rate, the highest of any advanced nation. It should be noted, however, that the effective marginal tax rate – or the rate a business would actually expect to pay on a marginal investment — is only 26%.


Stashing the Cash

U.S. Companies are sitting on piles of cash. They complain that our tax laws penalize them and so they have moved their cash off-shore. Even though U.S. rates are high, tax revenue has declined. The Week goes into more detail:

How bad is it? According to the Journal, General Electric keeps only $30.7 billion of its $85.5 billion in cash reserves in the U.S.; Microsoft has $8.6 billion in the states, and a whopping $58 billion overseas; Whirlpool keeps 85 percent of its cash offshore; and Johnson & Johnson has socked all of its $24.5 billion in other countries.

Money not in the U.S. cannot be used to create jobs in the U.S. Money not in the U.S. cannot be invested in new facilities in the U.S. We should all care about laws that have our corporations off-shoring their monies to save on taxes.

This problem is not unique to the US. British Prime Minister David Cameron is also on the case.

British Prime Minister David Cameron has blasted the world’s most powerful multinational corporations for lacking “moral scruples,” and has urged global action against “aggressive tax avoidance.”
According to the Committee, Starbucks paid just £8.6 million ($10.8 million) in corporate taxes in the UK in the last 14 years despite sales of £3 billion ($3.76 million). Internet giant Google reportedly paid £6 million in UK taxes on revenues of £395 million ($496 million). Amazon UK reported a turnover of £207 million ($260 million) in 2011, but its tax bill was just £1.8 million ($2.26 million).

What Do Corporations Actually Pay?

Bernie Sanders’ newsletter has some interesting statistics.

The fact of the matter is that tax revenue today amounts to only 15.7 percent of GDP, nearly the lowest in 60 years.

Today corporate profits are at an all-time high, while corporate income tax revenue as a percentage of GDP is near a record low.

At 1.6 percent, corporate revenue as a percentage of GDP is lower than any other major country in the Organization for Economic Cooperation and Development, including Britain, Germany, France, Japan, Canada, Norway, Australia, South Korea, Switzerland, Norway, Italy, Ireland, Poland, and Iceland.

At 15.7 percent, revenue as a percentage of GDP is at or near the lowest level in sixty years.

And from Forbes again:

The most egregious example is General Electric. Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.

Mind you, not all global megacorps enjoy such low tax rates. Try to muster some pity for Big Oil. ExxonMobil in its 2009 annual report to the SEC, recorded a larger income tax expense than any other U.S. company last year, some $17.6 billion, or 47% of pretax earnings. Exxon’s peers Chevron and ConocoPhillips likewise recorded similarly high effective tax rates. The oil companies are oddities among the multinationals because many of the oil-rich countries where they do business levy even higher taxes than the U.S.

* None of Exxon’s taxes were paid to the U.S. Government.

* Of Chevron’s $8 Billion in income taxes, only $200 million were paid to the U.S. Government.

* Bank of America had pretax income of $4.4 billion and had income taxes of (-$1.9 billion)

How did Bank of America not pay any taxes on $4.4 billion in income? Because of deductions like $860 million in tax-exempt income, $670 million in low-income housing credits and a $600 million loss on shares of foreign subsidiaries. With a provision for credit losses of $49 billion, Bank of America probably won’t be paying taxes for a long time.

The New York Times summarizes the issue of taxes paid or not paid.

Using information from the companies’ own corporate filings, however, the study concluded that a quarter of the 280 corporations owed less than 10 percent of profits in federal income taxes and 30 companies had no federal tax liability for the entire three-year period.
American corporations are paying a smaller share of taxes than in previous decades. They paid a total of $191 billion in federal income taxes in 2010, the Internal Revenue Service said, representing about 1.3 percent of the nation’s gross domestic product. That is down from about 6 percent during the 1950s (although some of the decline is because a smaller percentage of businesses now file as corporations).

With the exception of Senator Bernie Sanders, I used corporate friendly sources. Other, less friendly sources have basically the same numbers. We have over the last forty years, seen the largest international corporations play the global system to minimize their U.S. tax liabilities. When Republicans speak of protecting the “job creators,” don’t fall for it. The only jobs being protected are those of the congress people who keep passing laws that allow big corporations to ship their cash and the possibility of new American jobs off-shore.

What’s an Individual Citizen to Do?

Citizen’s for Tax Justice is worth a bookmark and a read.

Citizens for Tax Justice, founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation. CTJ’s mission is to give ordinary people a greater voice in the development of tax laws. Against the armies of special interest lobbyists for corporations and the wealthy, CTJ fights for:

Fair taxes for middle and low-income families
Requiring the wealthy to pay their fair share
Closing corporate tax loopholes
Adequately funding important government services
Reducing the federal debt
Taxation that minimizes distortion of economic markets

Don’t let the complexity silence you. Write your Senators and Representatives. Let them know how you feel.

Citizens United may have declared, as Mitt Romney put it, “Corporations are people my friend.” Corporations are not moral people. Corporations are legal entities. Corporations are not patriotic, except in the advertising pitches. We get the corporate persons we decide we want through the laws we pass. Corporate persons get the laws they want by hiring lobbyists. We must each be our own lobbyists if we are to reclaim fairness in the tax code. After all, with corporate tax revenues down, someone has to make up the difference.

  • winterbanyan

    Great explanation of a huge problem. I’m not sure exactly how we deal with it, except to penalize companies who off-shore both their jobs and profits… and then they’d just get up and move elsewhere entirely.

    We need global action on this so there are no havens. I will definitely bookmark Citizens for Tax Justice. There has to be a way.

    Thanks, addisanana!

    • addisnana

      The offshoring of monies, stashing the cash, reminds me of the coworker everyone has had who always has “left his wallet” someplace and could someone pay for his lunch. The offshore cash is the ‘left my wallet’ excuse.

      If you click on the Forbes link it goes to a very cool slide show of the top 25 companies. Those who do not have international operations like CVS Caremark (37.3%)drug stores end up paying much higher rates than companies who can take advantage of the stash the cash options. Kroger paid 35.8%. Walmart’s paid rate is 37.2%.

      The oil companies paid higher rates but not much made it to the US Treasury.

  • NCrissieB

    Thank you for this, addisnana. I agree with most of the goals of Citizens for Tax Justice, but not with the goal of minimizing distortion of economic markets. That goal – at least as stated there, and implicit in the Forbes quote about a “desirable” tax structure above – assumes markets are the most socially beneficial way to allocate capital.

    That assumption is not always true, and we use tax codes – at the federal, state, and local levels – to encourage private individuals and firms toward socially beneficial investments that would otherwise be too marginal to justify. Economists call these provisions “tax expenditures” because they substitute for direct government spending. In terms of public money, tax expenditures are more efficient than direct spending.

    A hypothetical example: assume the nominal corporate tax rate is 35% and that half of corporate investments in wind energy R&D are tax-deductible. Given those assumptions, a $1m private investment would yield a $175,000 tax deduction. (I.e.: taxpayers invest $175,000 and the corporation invests the other $825,000.) If the corporation expects that $1m total investment to be worth $1,031,250 after five years, a mere 0.6% annual return would not justify the risk. But with the tax deduction, the corporation expects to earn a 5% annual return on its $825,000 outlay – profitable enough to justify to shareholders – and that wind energy R&D costs taxpayers less than a fifth of what it would through direct spending.

    Of course, I chose wind energy R&D because we’re progressives and most of us think that would be worth funding. And yes, we progressives disagree with many of the tax expenditures that currently exist (e.g.: oil and natural gas drilling and development credits). But we should discuss that in terms of disagreement with the social benefits of specific tax expenditures, rather than rejecting the social benefits of all tax expenditures.

    Good morning! ::hugggggs::

    • addisnana

      It would seem that using the tax code to subsidize certain industries because we agree that they are socially beneficial is fine as long as we all agree that those are the things we want to have. The problem as illustrated by the still large subsidies to oil and gas is it is easy for such subsidies to become entitlements in the minds of those companies.

      Some of the other “quirks” like oil companies paying high income tax rates overall but very little of the income tax revenue making it into the US treasury are something else entirely.

    • winterbanyan

      We’ve definitely got a problem here, and I agree with addisnana on that. Perhaps the problem is that not enough of these loopholes “sunset.” Maybe they need to be fought out on a regular basis, re-defended for renewal.

      But again, I’m not sure how to deal with this. When the Republicans talk about “closing loopholes” I’m quite sure they don’t mean corporate ones.

  • Gardener

    We need, IMO, a Corporate Minimum Tax.

    • addisnana

      That’s a tough one Gardener. The corporations that didn’t pay any income tax had big losses they could charge against their profits. We’d have to cap losses to get to your minimum tax. I don’t know enough to really get into this. My citizen hat says if you’ve got that many losses carried over for that many years why in the heck are you still in business?

      How did Bank of America not pay any taxes on $4.4 billion in income? Because of deductions like $860 million in tax-exempt income, $670 million in low-income housing credits and a $600 million loss on shares of foreign subsidiaries. With a provision for credit losses of $49 billion, Bank of America probably won’t be paying taxes for a long time.

      JP Morgan Chase on the other hand paid 27.2% in taxes.

      Two businesses in the financial industry. One much better managed than the other IMHO.

    • Jim W

      Setting percentages of the tax dollar would be a different approach.

      Reducing the percentage from income and pay role tax and increasing the percentage from corporate profits would be the target.

      There is no justification for low taxes on the job creators when job creators includes vulture capitalists.

      On the Grocery business, Think Ahold.

      • addisnana

        Ahold paid no corporate income tax in 2010 and 2011. I read their summary financials. Since most of their operations are in Europe they are subject to very different tax laws. Why did you say, “Think Ahold”? I’m just curious.

        I liked the graph at the first link. Thank you.

        • Jim W

          Ahold has been investing in the US Grocery business and moving profits back home or off shore depending on your point of view.