Special Report: Corporate Taxes

Radical Compliance and Calcbench have another special research report on the streets today, this time examining what Corporate America actually pays in income taxes—which, over the last five years, averages around 22.8 percent of pre-tax income.

You can download and read the full report, “We Are the 22.8 Percent: Analysis of income taxes paid among S&P 500” at the Calcbench website, free of charge. My own, further observations are here.

We examined pre-tax income and income taxes paid among the S&P 500, for 2012 through 2016. Overall, tax payments fluctuated in a relatively narrow band, from 20.32 percent (2016) to 24.58 percent (2014).

 

 

Tax rates at individual companies were often much lower. For example, among the 451 firms that turned a profit in 2016, 132 of them paid taxes equivalent to rates of 15 percent or less. A full 40 percent of the group paid taxes at rates below 25 percent—the figure often cited as a possible new statutory tax rate for tax reform. (Then again, 141 companies paid taxes at the full 35 percent rate or even higher.)

Among the 10 firms ranked by largest pre-tax income, the average tax rate for 2016 was 17.5 percent. Only one, Verizon Communications, paid taxes at a rate above the statutory 35 percent; three paid at rates below 10 percent. See below.

 

 

The study also calculated the implied tax deficit—the difference between what large U.S. companies did actually pay in the last five years, versus what they would pay at the full 35 percent statutory rate. That implied tax deficit was $795.4 billion, an average of $159.1 billion annually over the last five years.

Some caveats:

• We excluded any companies that made no profit in our study, under the logic that most companies making no profit also pay no income taxes in that given year. That’s not entirely accurate; under rare circumstances, so companies operating at a loss do still pay income taxes— but those are on-time instances that don’t allow for apples-to-apples comparison.
• Are these tax rates here the same as a company’s effective tax rate? Not quite. In the strictest definition, effective tax rates are calculated after accounting for certain deductions, credits, and so forth. Our study kept matters simple by comparing actual cash paid in income tax to earnings before taxes— so these rates are quite similar to effective tax rates, but they are not the same thing.
• We found numerous companies that had negative tax rates: they get money back from Uncle Sam. We excluded them here, since they often arise under unusual, one-time circumstances. A company might have a negative rate one year thanks to a favorable IRS ruling, but in no other years; or the causes of negative rates might differ from one year to the next.

Taxes and Tax Reform

A certain president in the West Wing is fond of saying that U.S. corporations face the highest income taxes in the world— and from that premise, the Trump Administration and Republicans in Congress want to cut corporate tax rates as a central pillar of tax reform.

President Trump’s claims about high U.S. corporate tax rates are accurate only in the faintest whiff of the word. It’s like saying you face high prices for a car when you walk onto the dealership lot and ask, “How much?” Of course they quote you a high price. Nobody actually pays it.

The reality is that most large corporations already pay tax rates in the low 20s, thanks to tax management. For comparison purposes, if the S&P 500 companies in our study were their own country with a statutory tax rate of 22.8 percent, they would place in the middle of tax rates among the 35 countries in the Organization for Economic Cooperation and Development. (The United States’ 35 percent rate does place it highest among the OECD.)

Now, yes—companies can only achieve those lower rates thanks to aggressive tax deductions, exemptions, and other financial maneuvers; and claiming all those items does cost money. The question is whether those tax management costs, plus the lower taxes companies pay, equal what companies would pay at the full 35 percent statutory rate without any tax management, deductions, or other exemptions.

If Congress simply cuts statutory tax rates without reforming credits, deductions, and other tax management techniques, businesses will simply pay less in taxes, with unclear consequences for the federal deficit. If Congress cuts statutory rates to 20 or 25 percent, and does also eliminate various deductions and tax management techniques, that would simplify the tax code for corporations without any adverse risk of higher deficits.

We shall see.