How to earn $3.5 trillion and pay zero taxes
The April 2 release of a General Accounting Office report on corporate taxes could hardly have been better timed to get press attention. Just as millions of Americans were filling out their federal 2003 tax forms to beat the April 15 deadline, the GAO study indicated that most corporations owed no taxes from 1996 to 2000, a boom period for corporate profits.
Those untaxed corporations earned $3.5 trillion of revenues.
Any individual who paid taxes provides more money to run the government than these untaxed firms, says Barry Piatt, spokesman for Sen. Byron Dorgan (D) of North Dakota, who, with Sen. Carl Levin (D) of Michigan requested the study months ago. Next time Congress considers taxation, Senator Dorgan will be hammering at the legal "massive tax avoidance" by companies, promises Mr. Piatt.
For years, companies and their representatives, such as the National Association of Manufacturers, have complained that businesses are overtaxed. The latest studies of corporate taxation suggest that, in general, this is not true. "The usual arguments may be baloney," says Piatt.
The GAO study found that 71 percent of foreign-controlled corporations operating in the United States paid no taxes in those five years; nor did 61 percent of US-controlled companies.
The basic corporate tax rate stands officially at 35 percent. In reality, it's far below that for most companies. And the importance of corporate tax revenues for Uncle Sam has shrunk. That's shown by the numbers.
Corporate taxes have fallen from 5 percent of gross domestic product, the nation's output of goods and services, in 1946 to 1.4 percent now.
As a percentage of all federal tax revenues, corporate tax payments have declined from 23 percent in 1960 to 13 percent in 1980 and 8 percent today.
Using data from the financial statements of publicly traded companies, the average effective tax rate was 12 percent in 2002, down from 15 percent in 1999, and 18 percent in 1995, according to a study by John Graham, a finance professor at Duke University's Fuqua School of Business.
And Washington is not doing as much as it has in the past to see that companies pay their tax bills. In 2003, the Internal Revenue Service conducted face-to-face audits of only 29 percent of the largest firms - those with assets of more than $250 million. That compares with 34.7 percent in 1999, notes a report by Transactional Records Access Clearinghouse, a government watchdog group. The IRS says it's stepping up tax shelter investigations, and adding 250 examiners to its corporate division this year.
In 2003, the effective corporate tax rate probably rose as losses carried over from the last recession ran out and profits soared, Mr. Graham suspects. Yet, he adds, "It is surprising that corporations get away with such a little amount of taxes on average."
Other factors reducing the corporate tax burden in recent years include more tax shelters, new tax breaks, and the transfer of profits by multinational companies to low-tax foreign nations, figures Martin Sullivan, an economist with Tax Notes, a prominent tax publication. Companies have also written off the cost of stock options from their tax liability, yet largely ignore their cost in their profit and loss statements. Proposed changes in accounting rules may stop this practice.
The issue of corporate taxes was also thrust into the presidential campaign by Democratic Sen. John Kerry's criticisms of President Bush for failing to crack down on corporate tax dodgers. As for Senator Kerry's proposal to trim corporate income taxes by 5 percent, Richard Du Boff, a professor emeritus of economics at Bryn Mawr College, outside Philadelphia, calls it a "bad idea." Kerry has mentioned offsetting any revenue loss by "eliminating tax loopholes that push jobs overseas."
Mr. Du Boff remains unimpressed: "In every way, shape, and form," both Demo- crats and Republicans have been "doing their best to lower the corporate tax burden," he says.
Curiously, economists on both the right and left agree on the need to close corporate tax loopholes.
"A good idea," says Paul Weinstein, an economist with the Progressive Policy Institute in Washington.
Similarly, Chris Edwards, an economist at the libertarian CATO Institute, would like to see the "incredibly complicated" corporate tax system simplified by eliminating some tax breaks and then reducing the nominal 35 percent rate. "That would take away the incentive for companies to hide money," he says.
But members of the congressional tax committees have milked the tax code for years to obtain campaign money, he says. The corporate research and development tax credit, for instance, is only renewed for a year or two at a time. That encourages firms that benefit from the credit to continue to make party donations.
Who bears the brunt of corporate taxes has always been something of a mystery to economists. Do the taxes paid by firms get shifted to consumers in the form of higher prices, to employees in the form of lower wages, or to shareholders by lower dividends and profits? Or to all of them?
"We really don't know," says Sullivan.
But if Washington decides more revenues are essential, corporations may not be able to duck the tax man next time.