The importance of cutting the 35 percent corporate tax rate has become a mantra in Washington, but here’s the thing: Most companies don’t pay it.
President Donald Trump, who continues to push for slashing the rate to 15 percent, frequently says that U.S. corporations pay the highest taxes in the world. But that rhetoric masks some key facts.
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Like individual taxpayers, corporations take deductions and credits that reduce the amount of taxes they actually fork over to the IRS. The average effective tax rate on corporations is 23 percent, according to the Treasury Department, one-third below the sticker price, though still higher than many other developed nations.
And that average hides a wide variation in what different industries and businesses pay, with some — retailers, like Walmart, for example — paying close to 35 percent. Others, like technology and pharmaceutical firms, pay a fraction of that, or even nothing at all.
That’s partly because some are able to use clever lawyering to avoid paying, by stockpiling profits in overseas tax havens, for example.
But much of it is also the result of decades-old provisions in the tax code that enjoy broad bipartisan support, such as special breaks for research and development that are hugely important to some industries and meaningless to others.
“A lot of this stuff that causes these differences across industries is very deliberate,” said Adam Looney, a former top Treasury Department tax aide. “They’re not loopholes — they’re things people want.”
Reducing the statutory rate is a centerpiece of Republican tax reform efforts — to 20 percent in the House GOP proposal and 15 percent in Trump’s. Both proposals would cost well over $1 trillion.
Trump, before a meeting Tuesday with top lawmakers and administration officials trying to negotiate a tax deal, pointed to strides the economy has made in recent months.
“But if we’re going to keep this momentum going and allow the economy to truly take off as it should, it is vital that we reduce the crushing tax burden on our companies and on our workers,” he said. “We pay the highest tax of any country in the world on businesses and we can’t keep doing that.”
The picture is much messier, though, than what often emerges from the corporate tax-reform debate in the capital, and that helps explain why lawmakers have so much trouble getting an overhaul off the drawing board.
Because companies pay such differing rates, they don’t agree on how to change the system — some want to push the corporate rate as low as possible while others would be happy with a higher rate provided they can hang onto their favorite tax breaks.
It’s also why the two political parties sometimes seem like they’re talking past each other.
Republicans, who emphasize the statutory rate along with the companies that pay close to it, often paint businesses as victims of a punishing corporate tax code. Rep. Peter Roskam (R-Ill.), head of the Ways and Means subcommittee on tax policy, has likened the recent string of companies re-incorporating abroad in so-called inversions to a “prison break.”
Democrats point to companies paying well below 35 percent, arguing they are not paying their fair share and that the corporate tax system is not as out of whack with international norms as Republicans contend.
“Talking about effective tax rate and tax rates in general is a choose-your-own adventure deal,” said Kyle Pomerleau, an economist at the nonpartisan Tax Foundation. “People will choose which rates line up with their world view.”
It’s true the 35 percent rate is high by international standards. Combined with state taxes, it’s 15 points higher than the average among peer economies, and far higher than Hungary (9 percent), Ireland (12.5 percent) and the United Kingdom (19 percent). It even tops France’s 34.4 percent.
What’s more, unlike most other countries, the U.S. taxes companies on their worldwide earnings, not just what they make at home.
But what companies typically pay, after credits and deductions is much lower, though estimates vary. They range from a high of 29 percent, pegged by the CBO earlier this year, to a low of 14 percent for large profitable firms between 2008 and 2012, according to the Government Accountability Office.
The figures vary so much because of an accounting conundrum. While dividing a companies’ taxes into its profits may seem like basic math, there are different interpretations of what counts as profits. The numbers can swing wildly depending on whether only domestic income is included or international as well.
Including companies that lose money will drag down the average, because businesses only pay taxes on their profits.
Even when effective rates are calculated can be controversial. Measuring them in the wake of the recent Great Recession would show lower tax bills because companies could carry forward losses they sustained during the downturn.
“It is a bit of a muddle, and this is why you will see hugely conflicting statements about whether U.S. companies have high or low effective tax rates,” said Peter Merrill, a principal at PwC and former Joint Committee on Taxation economist. “For all the different ways to do it, the U.S. is high relative to its peers, but you get a different answer depending on which measure you use.”
What’s not in dispute is that different companies pay very different rates.
Construction companies paid an average 30.3 percent rate while retailers paid 27.9 percent, the Treasury Department said last year. At the other end of the spectrum are utilities, with an average rate of 14.5 percent, and mining at 21.6 percent.
There is even greater variation among individual companies. Eighteen of the 258 Fortune 500 companies that were consistently profitable between 2008 and 2015 did not pay any federal taxes during those years, according to the Institute on Taxation and Economic Policy, a liberal group that analyzed their SEC disclosures. Among them: General Electric, Priceline.com and Duke Energy.
Another 30 of the companies had effective rates of less than 10 percent, the group said. Yet it also found that 66 companies — about one-quarter of those analyzed — paid effective rates of more than 30 percent.
“For every company that is essentially crying wolf, saying this tax rate is too high even though they’re not actually paying it, there’s another company that really is paying something close to the statutory tax rate,” said Matt Gardner, a senior fellow with the group.
“A pretty central component to tax reform ought to be trying to find a way to equalize the effective tax rates between different industries, and certainly equalizing the effective tax rates within industries, so that the tax system isn’t benefiting one company over its competitor,” he said.
Some companies, particularly ones dealing with intellectual property, are able to take advantage of cracks in the code that allow them to book profits overseas, out of the reach of the tax man.
But many of the reasons for the hugely fluctuating rates among businesses are the incentives lawmakers have long agreed ought to be part of the code.
One of the largest is accelerated depreciation, which allows companies to quickly write off the cost of investments. It’s long been supported by lawmakers in both parties, because it’s believed to be good for the economy. But it also contributes to inequities in the code because some businesses — like utilities — buy lots of equipment that can be depreciated while others — like banks — do not.
Another is a research and development tax credit that’s been in the code for more than 30 years. It’s huge for companies like Apple and General Electric, but means little to others like Wal-Mart and Target — further contributing to the widely varying rates seen among businesses.
Other broadly supported provisions that bring down effective rates include the domestic production deduction, designed to encourage companies from moving overseas, and a program that subsidizes low-income housing by allowing building developers to sell tax credits to companies looking for ways to reduce their tax bills.
One of the surprising consequences of many tax-reform proposals aiming to cut the corporate rate by junking deductions is that they end up making big winners out of Wall Street banks.
That’s because they tend to not have very much they can depreciate, and they don’t do much research or any manufacturing, so they end up not having to give up very much in order to get a lower corporate tax rate. That’s why former Ways and Means Chairman Dave Camp included a special bank tax in his 2014 tax-reform plan — so it wouldn’t end up looking like a sop to big banks.
Unlike Republicans, Democrats are split over how much of an overhaul of the corporate code is necessary. Some argue lawmakers ought to be focused less on wholesale reform, and more on shutting down the accounting maneuvers companies use to avoid paying.
“America is not a prison for American business — we have some of the most competitive businesses in the entire world,” said Rep. Lloyd Doggett of Texas, a Ways and Means Democrat.
“The reason these companies have suddenly renounced their American citizenship and gone abroad, in many cases, is because of the consistent refusal of our Republican colleagues to support measures to put a stop to it — they won’t close the door,” he said.