U.S. Corporations Are Not Overtaxed
The real goal should be to fund public investment and address the deficit
February 24, 2012
Unfortunately, the corporate tax reform "framework" released by the Obama administration does not include what should be the main goal of reform—raising revenue to fund public investments and address the budget deficit.
The president's framework calls on Congress to close over a trillion dollars worth of tax loopholes and use the savings to pay for more corporate tax breaks—including a reduction in the statutory corporate tax rate from 35 to 28 percent.
U.S. corporations are not overtaxed. My organization studied most of the Fortune 500 companies that have been profitable in each of the last three years and found that their average effective tax rate during that period was just 18.5 percent.
This means big corporations' effective tax rates (the percentage of profits they actually pay in taxes) are only about half the statutory tax rate of 35 percent that corporations complain about. Thirty corporations had net negative taxes (meaning they received money back from the Treasury) over the three-year period.
One such corporation is Boeing. Last week President Obama told a crowd at a Boeing plant that revenue saved from closing tax loopholes "should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America." But Boeing paid federal income taxes in only two of the past 10 years. Its total taxes over that period were less than zero—despite its $32 billion in U.S. profits!
One cause of corporate tax avoidance is the rule allowing U.S. corporations to indefinitely "defer" U.S. taxes on their offshore profits. This loophole encourages companies to shift jobs offshore and to use accounting gimmicks that shift their U.S. profits, on paper, to tax-free offshore tax havens.
The "minimum tax" on offshore profits proposed in the president's framework may combat these abuses, depending on its rate, which the framework leaves unspecified.
The goal of such a reform is not to tax profits that are really earned abroad. The U.S. corporate tax allows companies a credit for any corporate taxes they pay in other countries, which avoids double taxation. This would not change.
The real goal is to prevent U.S. corporations from shifting profits to tax haven countries where they are not taxed. Congress should end "deferral" or enact a minimum tax strong enough to address this problem.