By Cliff Montgomery – Aug. 31st, 2014
Those who call for a low U.S. income tax rate on corporations often say that the nation’s statutory corporate tax rate of 35 percent is high, at least when one compares it to other countries.
But they conveniently fail to mention that U.S. law offers numerous exemptions, deferrals, tax credits and other forms of incentives for corporations – and that these options serve to greatly lower corporate tax payments.
The result?
“For tax year 2010 (the most recent information available), profitable U.S. corporations that filed a Schedule M-3 paid U.S. federal income taxes amounting to about 13 percent of the pre-tax worldwide income that they reported in their financial statements,” according to a little-noticed report released last year by the U.S. Government Accountability Office (GAO).
Even more shocking, “GAO’s 2008 report on corporate tax liabilities found that nearly 55 percent of all large U.S.-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005,” stated last year’s eye-opening study.
Below, The American Spark offers its readers essential quotes from the 2013 GAO report:
“Proponents of lowering the U.S. corporate income tax rate commonly point to evidence that the U.S. statutory corporate tax rate of 35 percent, as well as its average Effective Tax Rate [ETR] – which equals the amount of income tax corporations [actually] pay divided by their pre-tax income – are high relative to other countries.
“However, GAO’s 2008 report on corporate tax liabilities found that nearly 55 percent of all large U.S.- controlled corporations reported no federal tax liability in at least one year between 1998 and 2005.” […]
“Statutory tax rates provide only a limited measure of the share of income that businesses pay in taxes because many other aspects of the tax system – such as exemptions, deferrals, tax credits, and other forms of incentives – also determine the amount of tax that a business ultimately pays on its income.
“The average Effective Tax Rate [ETR] reflects the combined effects of all these tax system components. However, obtaining the data to calculate ETRs is challenging. The two typical sources, tax returns and financial statements, both have limitations.
“Given the difficult budget choices Congress faces and its need to know corporations’ share of the overall tax burden, you asked us to assess the extent to which corporations are paying U.S. corporate income tax.” […]
“Lacking access to detailed data from tax returns, most researchers have estimated ETRs based on data from financial statements.
“A common measure of tax liability used in past estimates has been the current tax expense—either federal only or worldwide (which comprises federal, foreign, and U.S. state and local income taxes). The most common measure of income for these estimates has been some variant of pre-tax net book income.
“GAO was able to compare book tax expenses to tax liabilities actually reported on corporate income tax returns.
“For tax year 2010 (the most recent information available), profitable U.S. corporations that filed a Schedule M-3 paid U.S. federal income taxes amounting to about 13 percent of the pre-tax worldwide income that they reported in their financial statements (for those entities included in their tax returns).
“When foreign and state and local income taxes are included, the ETR for profitable filers increases to around 17 percent.
“The inclusion of unprofitable firms, which pay little if any tax, also raises the ETRs because the losses of unprofitable corporations greatly reduce the denominator of the measures. [But] Even with the inclusion of unprofitable filers, which increased the average worldwide ETR to 22.7 percent, all of the ETRs were well below the top statutory tax rate of 35 percent.
“GAO could only estimate average ETRs with the data available and could not determine the variation in rates across corporations.
“The limited available data from Schedules M-3, along with prior GAO work relating to corporate taxpayers, suggest that ETRs are likely to vary considerably across corporations.”
