Effective Corporate Tax Rates

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.

By BRUCE BARTLETT
November 26, 2013

Although the prospects for tax reform in Congress have dimmed of late, the lobbying activity has not. The corporate community continues to put pressure on Congress to reduce the statutory corporate tax rate, which, at 39.1 percent including state and local taxes, is the highest among members of the Organization for Economic Cooperation and Development.

What tends to get lost in the debate is how much corporations actually pay in taxes once various deductions and credits are taken into account. A corporation’s total tax bill divided by its profits is its effective tax rate. It’s hard to imagine a corporation paying anywhere close to 39 percent of all its profits in taxes, as that would mean it has no deductions or credits whatsoever.

According to the Internal Revenue Service, corporations had gross profits of $1.8 trillion in 2007 and taxable income of $1.2 trillion. Since the Tax Reform Act of 1986, new corporate tax preferences have widened the gap between gross income and taxable income. In 1987, gross corporate profits reported on tax returns were $328 billion and taxable income was $312 billion. Thus since 1987, taxable income has fallen to 68 percent from 95 percent of gross income.

Of course, many corporations are so adept at manipulating the tax code that they pay no federal taxes at all. According to Citizens for Tax Justice, a progressive group, 78 companies paid no federal income taxes at least one year between 2008 and 2010. The data come from annual company reports and may not necessarily reflect actual tax payments on tax returns because of different accounting concepts.

Earlier this year, the Government Accountability Office, a federal agency, examined corporate tax returns to determine the taxes corporations actually pay. It found that in 2010, profitable corporations based in the United States had an effective federal tax rate of 13 percent on their worldwide income, 17 percent including state and local taxes.

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The exclusion of foreign taxes is not significant, because American companies get a 100 percent credit for all foreign taxes paid against their tax liability in the United States.

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The independent economist Martin A. Sullivan concluded that the truth is somewhere in between, with the effective corporate tax rate in the mid to upper 20 percent range. In the Nov. 25 issue of Tax Notes magazine, the G.A.O. economists who conducted the original study acknowledged that averaging their results over several years and including foreign taxes, as Mr. Lyon did, would raise the effective tax rate to 22.9 percent. The remaining difference between their study and the Lyon study results from the inclusion of companies with losses.

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