Even though the United States has the highest corporate tax rate in the world, many American companies pay little or nothing in taxes – and some even get refunds.
That doesn't mean that U.S. companies necessarily cheat Uncle Sam, but the steadily falling amount of corporate taxes paid has clearly helped boost profitability.
A recent analysis by The Washington Post showed that it was typical for companies in the Dow Jones Industrial Average in the 1960s and 1970s to pay federal taxes that were between 25% and 50% of their global profits.
Today, most big U.S. companies pay half that.
A study by NerdWallet of the 500 biggest U.S. companies last fall showed that while the statutory corporate tax in the U.S. is 35%, the actual rate paid – not the amount companies set aside for taxes – is down to an average of 13%.
According to the NerdWallet data, 20% of the top 500 U.S. companies paid nothing in corporate taxes in 2011, and 42% paid between 0% and 15%.
The discrepancy has led some in Washington to call for corporate tax reform, which many U.S companies actually support – but mainly because they'd rather pay even less.
"We need to take steps to make our tax system more competitive and better aligned with the rest of the world by undertaking comprehensive tax reform that will reduce the corporate tax rate," Bob McDonald, CEO of The Procter & Gamble Co. (NYSE: PG), said in a statement released before a meeting of top U.S. CEOs with President Barack Obama in November.
Why Corporate Taxes Are So Low
The main reason corporate taxes have fallen off so much is that multinational companies have avoided bringing foreign profits home. As long as the profits stay overseas, a company can defer paying federal taxes on them.
But this often is not just money earned overseas; many companies have figured out schemes to transfer profits earned in the U.S. to overseas tax shelters.
For example, by using a Puerto Rico-based subsidiary, Microsoft Corp. (Nasdaq: MSFT) was able to shift $21 billion in revenue from 2009-2011 – about half its U.S. retail sales – offshore. The Senate Permanent Subcommittee on Investigations estimated the scheme saved Microsoft up to $4.5 billion in U.S. taxes.
With so much of its profits sheltered from U.S. corporate taxes, Microsoft's reported tax expense as a percentage of income has plunged from 33% in 1987 to 10% in 2012.
Other companies are able to take advantage of various loopholes or unusual losses to reduce their corporate taxes, and in some cases qualify for a huge refund.
- Last year, Verizon Communications Inc. (NYSE: VZ) raked in more than $100 billion in revenue, and yet collected a federal tax refund of $660 million. How? Verizon booked a big one-time charge related to pension liabilities in the fourth quarter, combined with large losses resulting from Superstorm Sandy.
- For Bank of America Corp. (NYSE: BAC), the pain of two costly settlements – $2.5 billion and $2.7 billion – in cases related to its home loan business hurt a bit less after the big bank received a $1.12 billion tax refund from Uncle Sam.
- Exxon Mobil Corp. (NYSE: XOM) claims to be paying more taxes than it really is. The oil giant reported last year that it had paid $57 billion in taxes over the previous five years. But as it turns out, most of that amount should have counted as operating expenses – royalties paid to the government to access deposits on federal land. Backing out those payments puts Exxon's tax expenses at just $9.6 billion over those same five years. In 2011, Exxon made $41.1 billion in profit, while actually paying U.S. corporate taxes of just $1.5 billion.
- General Electric Co. (NYSE: GE) may be the most notorious of them all, however. The Citizens for Tax Justice found last year that GE paid a tax rate of just 1.8% between 2002 and 2011 – a fraction of the official rate of 35% – despite making $81 billion in profits.
Company executives routinely deflect criticism about ridiculously low corporate tax rates, invariably saying that they are in compliance with all tax laws.
And as bad as it looks, corporations are not to blame. They'd be remiss in their fiduciary duty to shareholders if they did not exploit every legal tax advantage they can, and every year their accountants get better at it.
That means the situation can only keep getting worse unless Washington takes serious and smart action on corporate tax reform – something few expect.
"I think tax reform on this front is going to be really, really tough," Jia Lynn Yang, the Washington Post reporter who wrote the story on declining corporate tax rates, said in a Huffington Post interview. "This is the most heavily lobbied topic in Washington."
Related Articles and News:
- Money Morning:
2013 Tax Changes: These 5 Deductions and Loopholes Might Get Slashed
- Money Morning:
Why Forcing U.S. Companies to Bring Cash Home is a Bad Idea
- The Washington Post:
Post analysis of Dow 30 firms shows declining tax burden as a share of profits
- 24/7 Wall St.:
Companies Paying the Least inTaxes
- Huffington Post:
Big Companies, Low Taxes
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