Large, profitable U.S. corporations paid an average effective federal tax rate of just 12.6% in 2010, far less than the U.S. statutory rate, according to a Government Accountability Office report released today by two senior senators.
The report, requested by Sen. Tom Coburn, R-Okla., and Sen. Carl Levin, D-Mich., adds to the growing evidence that large, profitable corporations bear a dwindling share of the tax burden and that the Treasury collects far less revenue from large, profitable corporations than might be expected under the U.S. statutory corporate income tax rate of up to 35%.
"Today's GAO report provides more stark evidence, if any is needed, that large, profitable U.S. corporations as a whole are not paying their fair share in taxes," said Levin. "When some U.S. corporations use unjustifiable loopholes and offshore gimmicks to avoid paying Uncle Sam, their tax burden is shifted onto hardworking American families and small business. Today's GAO report quantifies just how much of the corporate tax burden has been shifted onto other taxpayers: America's large, profitable corporations are now paying a lower tax rate than our teachers and firefighters."
"This report underscores the need for comprehensive tax reform," said Coburn. "Creating giveaways and loopholes for corporations is both anti-competitive and unfair to working families. Every tax earmark for a corporation is effectively a tax rate increase for middle and lower income Americans. An individual's or corporation's tax rate shouldn't be dependent on their ability to hire a tax lobbyist. It's especially wrong to ask families who are struggling to make ends meet to subsidize special breaks for corporations. We would be better off with a code that eliminated these loopholes so we can lower rates for both corporations and individuals."
Levin and Coburn requested the report in 2012, when they were chairman and ranking member, respectively, of the U.S. Senate Permanent Subcommittee on Investigations. In response, GAO conducted a year-long study examining how effective tax rates are typically calculated, and developed a new methodology using corporate tax returns. The GAO compiled the tax return data from these large corporations for tax years 2008 through 2010, and compared it with the income reported on financial statements filed with the Securities and Exchange Commission. Average corporate effective tax rates are generally computed as the ratio of taxes paid or tax liabilities accrued in a given tax year over the net income declared by the corporation during that same year.
GAO found that, on average, large, profitable U.S. corporations paid U.S. federal income tax amounting to just 12.6% of their worldwide income, a tax rate which is only about one-third of the U.S. statutory rate. GAO also found that the relatively low effective tax rate paid by U.S. corporations did not substantially increase when other taxes paid by those corporations were taken into account. GAO found that, in 2010, adding foreign, state, and local taxes to federal income taxes increased the average effective tax rate of large, profitable U.S. corporations by about 4 percentage points to 16.9% of their worldwide income. That composite tax rate is still less than half the U.S. statutory rate.
In calculating these rates, GAO used tax data taken from M-3 tax returns filed with the Internal Revenue Service (IRS) by corporations with at least $10 million in assets. Using actual tax return data enabled GAO to develop more accurate figures for the taxes paid by large U.S. corporations than studies using tax information provided in their financial statements. GAO noted that the amounts reported in the corporate tax returns were, on the whole, lower than the tax liabilities reported in the corporate financial statements.
GAO also noted that some studies calculating effective tax rates included unprofitable corporations in their analysis, but explained that "[t]he inclusion of unprofitable firms, which pay little if any actual tax, can result in relatively high estimates because the losses of unprofitable corporations greatly reduce the denominator of the effective rate" and "do not accurately represent the tax rate on the profitable corporations that actually pay the tax." GAO calculated that when unprofitable corporations were included in its data, the average effective federal tax rate rose from 12.6% to 16.6%, because those corporations had lost $315 billion and thereby reduced the overall net income against which the corporate tax payments were compared. The resulting tax rate, however, overstated the effective tax rate actually paid by large, profitable U.S. corporations.
GAO's finding that corporations pay far below the U.S. statutory rate is consistent with other work performed by the Permanent Subcommittee on Investigations. Over the past ten years, the Subcommittee has examined a number of the tax loopholes and gimmicks used by some profitable U.S. corporations to avoid paying U.S. taxes. Last year, for example, a Subcommittee hearing showed how Microsoft used tax gimmicks to shift 47 cents of every dollar in U.S. sales revenue offshore and, over a three year period from 2009 to 2011, avoided paying taxes on income exceeding $20 billion. Earlier this year, a Subcommittee hearing showed how Apple Inc. created three offshore corporations that supposedly had no tax residence anywhere in the world, funneled over $74 billion in profits through them over a four year period from 2009 to 2012, and paid no U.S. tax on any of those profits.
The GAO report is also consistent with other studies demonstrating that large, profitable corporations are often able to minimize, if not entirely avoid, paying U.S. income taxes. For example, a 2012 study by Citizens for Tax Justice found that, over a recent three year period, 30 of the largest U.S. multinationals, with more than $160 billion in profits, paid no federal income taxes at all.
Data show that corporate income tax revenue has accounted for a smaller and smaller share of federal tax receipts over the years. According to the Congressional Research Service, the share of corporate income taxes has fallen from 32% to just 9% of federal tax revenue, a decline charted in the GAO report. At the same time their portion of tax receipts has fallen, U.S. corporate profits have reached an all-time high, reflecting the highest percentage of all U.S. income since World War II. Despite corporations' growing share of income, GAO reported that in 2012, corporate income taxes contributed only about $242 billion to federal tax receipts, while individual income taxes contributed nearly five times more at $1.1 trillion.
Multinational corporate tax avoidance has become so widespread and damaging that it has attracted international condemnation. At a G8 summit in June, global leaders, including President Obama, criticized corporate tax dodging and committed to making multinational corporations disclose the taxes they pay on a country by country basis, and to stop allowing companies to shift profits across borders to avoid taxes.
"Some U.S. multinational corporations like to complain about the U.S. 35% statutory tax rate, but what they don't like to admit is that hardly any of them pay anything close to it," said Levin. "GAO has calculated that the average corporate effective tax rate of large, profitable U.S. corporations is less than 13%, about a third of the statutory rate. The big gap between the U.S. statutory tax rate and what large, profitable U.S. corporations actually pay is due in large part to the unjustified loopholes and gimmicks that riddle our tax code. When Congressional leaders talk about tax reform, closing egregious corporate loopholes, particularly those that enable corporations to shift income and intellectual property to offshore tax havens, ought to be at the top of the list. Congress also needs to jettison the idea of revenue neutral corporate tax reform which would just bake into the tax code all the revenues lost to multinational corporation's current tax avoidance. Any tax reform worth doing has to ensure that profitable multinational corporations pay the same or a larger tax rate than middle class American families."
The GAO report is entitled, "Corporate Income Tax: Effective Tax Rates Can Differ Significantly from the Statutory Rate," No. GAO-13-520.