America's soon-to-be 45th president, Donald J. Trump, wants to cut the federal income tax rate U.S. corporations pay from 35% to 15%.
While that appears to be a gift to companies who most Americans don't believe pay their fair share of taxes, it really and truly isn't.
What it would be is a gift to the federal government, and to you, and to me.
Hardly any U.S. corporations, big or small, pay the 35% federal income tax rate in the first place. In fact, the so-called statutory rate isn't a flat 35%, it's a progressive rate that goes from 15% up to 35% depending on how much pre-tax income (before credits) companies make.
The truth is most corporations have a federal effective tax rate (ETR) of about 14%, so making the national rate a flat 15% would be a win-win for the federal government and the average citizen.
How the Tax Code Is Being Used Now
Some people say it's un-American to not pay your fair share of taxes. Others say it's every American's right to pay as little tax as they have to. Everyone says the same thing about companies paying their taxes.
Yet, it's not a matter of what anyone thinks, what matters is the law of the land.
And that means the federal tax code.
The tax code was first written in 1913 as part of the 16th Amendment that created a federal income tax.
The tax code was originally about 400 pages long, but it ballooned to 8,200 pages as World War II wore on. It then exploded from 26,300 pages in 1984 to more than 74,608 pages today.
It's a boondoggle on steroids, but it's the law. However, it's not at all an impediment to people and companies who can afford smart lawyers and accountants capable of parsing the code to their advantage.
To be clear, that's not breaking the law – that's using the law to your benefit.
Like it or not, "working the code" to your personal or corporate benefit to reduce your tax liability is not only legal, it's smart. It has nothing to do with being a good or bad American.
According to a U.S. Government Accountability Office (GAO) report published in March 2016, though the statutory federal corporate income tax rate went from 15% to 35%, from 2006 through 2012, two-thirds of active companies in the United States paid no federal taxes at all. In 2012, of companies that had assets of more than $10 million, 42.3% paid no tax. Of those that made a profit in 2012, 19.5% didn't pay any federal income tax.
The GAO reported that from 2008-2012, large U.S. corporations had an effective tax rate (pre-tax net income minus credits and expense deductions) of just over 14%.
In other words, the so-called statutory top corporate rate of 35% being knocked down to 15% has already happened, at least in ETR terms.
In statutory terms, …
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.