Corporations share of taxes lowest since World War II
By Dan Ackman
First published by Forbes.com, Sept 23, 2004
NEW YORK — The effective tax rate for America’s largest and most profitable corporations has sharply declined in recent years, and one third of such companies paid zero taxes–or less–in at least one of the last three years, according to a study released yesterday.
At the same time, IRS data indicates that the overall share of federal taxes paid by corporations in now less than 10%, down from nearly 13% in 1997.
The study released yesterday by Citizens for Tax Justice and the affiliated Institute on Taxation and Economic Policy finds that in 2003 alone, 46 of the 275 companies it reviewed paid no taxes at all in 2003, despite reporting a total of $42.6 billion in pre-tax profits. Indeed, these companies received $5.4 billion in tax rebates that year. In the last three years, 82 of the country’s largest profitable corporations paid no federal income tax for at least one year of the Bush administration’s first three years, the study found.
The overall effective tax rate for these companies was 17.2% in 2003 and 2002, down from 21.4% in 2001. The current effective rate is about half the putative 35% tax rate on the profits of large companies.
This trend occurred against a backdrop of rising corporate earnings. The study attributes the trend to the widening availability of offshore tax shelters and other lawful avoidance techniques. Together the companies reported profits of $1.1 trillion over the three-year period and paid about $189 billion in taxes. The reduction from nominal rates was caused by the companies’ abilities to shelter $540 billion in the pre-tax profits reported to shareholders.
The recent drop in effective corporate tax rates is also underscored by the declining share of all taxes paid by corporations. In 1998, corporations paid 12.1% of all federal taxes, according to IRS data. That year, individual taxes accounted for 52.5% of taxes paid and employment taxes accounted for 31.5% of the total. For 2003, corporations paid 9.9% of the total and individuals paid 50.6%. The biggest change was in the percentage covered by payroll taxes (Social Security and Medicare), which jumped to 35.6% of the total.
Over the longer term, the percentage of taxes paid through individual returns has, since 1980, fluctuated between 49% in the low year of 1992 and 56% in the high year of 1982. The corporate tax share has gone up and down within a narrower 10% to 12% range. But in 2001, corporate taxes were just 8.8% of the total; they rose to 10.5% in 2002 before falling to 9.9% last year, according to IRS data.
What the Citizens for Tax Justice terms “loopholes and other tax subsidies” led to savings of $71 billion for the biggest companies in 2003, up from 43.4% in 2001. Half of the “tax-break dollars” over the three-year period went to just 25 companies, the study says. All told, 82 companies paid zero or negative taxes in at least one of the last three years and 28, including Boeing (nyse:BA), paid negative taxes for the entire period.
The largest beneficiaries were some of the most profitable companies: General Electric, SBC Communications, Citigroup, IBM and Microsoft. Of the 10 most profitable U.S.-based companies on the Forbes 2000, only Wal-Mart and Freddie Mac do not appear on the study’s list of top 25 tax break beneficiaries.
The primary reason for the decline in corporate tax payments was changes in the law allowing for accelerated depreciation of investments. This rule “is technically a tax deferral, but so long as the company continues to invest, the deferral tends to be indefinite,” the study says. It also points to the deduction for tax purposes of stock option grants, which companies do not deduct for the purpose of reporting profits to shareholders, though there has been much talk about changing the rule for profit accounting purposes as well.
Bruce Schaefer, a New York corporate tax lawyer and author, cites another reason for the reduction in tax payments by companies. “There used to be no deductions for any intangible asset for which you could not prove a useful life, with goodwill being the primo example; now there is.”
The study says that the changes in corporate tax laws rules have not had their desired effect of spurring investment. Since 2003, the 25 companies that saved the most from the new rules actually reduced their investment in property, plant and equipment by 27%. The remaining 250 companies surveyed reduced their investments, too, but by much less, 8%.