CTJ Reports

President Obama’s proposal to extend most, but not all, of the Bush tax cuts, would result in 1.9 percent of Americans losing some portion of the Bush income tax cuts. In 22 states, less than 1.5 percent of residents would lose some portion of their income tax cuts under the President’s proposal.

Read the fact sheet.

How U.S. taxpayers and taxpayers in each state would be affected by two competing approaches to the Bush tax cuts. Report with figures for the entire U.S. plus reports with figures specific to each state and the District of Columbia.

Check Out the Special Report Landing Page

Read the report.

Read the PDF version of this document.

Nothing better illustrates the difference between President Obama and Mitt Romney when it comes to taxes than how each of them would fare under their competing tax plans.

Citizens for Tax Justice has done the calculations for 2013, based on what the two candidates have proposed. The differences are striking.

In a nutshell, Obama thinks that very high income people, especially the super-rich like Romney, ought to pay more in taxes to support the country that helped make their success possible. Romney thinks that the big winners in our society, especially the biggest winners like himself, ought to pay a lot less.

Mitt Romney:

  • Under his own tax plan, Mitt Romney would pay only 13.1 percent of his $23 million income in federal income tax, Social Security tax and Medicare tax.
  • Under Obama’s plan, Romney would pay a 34.3 percent federal tax rate

President Obama:

  • Under his own tax plan, President Obama would pay 28.4 percent of his $874,000 income in federal income tax, Social Security tax and Medicare tax.
  • Under Romney’s plan, Obama would pay only an 18.1 percent federal tax rate.

CTJ’s calculations are based the latest tax returns released by the candidates, for 2011 in the case of President Obama and for 2010 in the case of Mitt Romney. The income figures were adjusted for inflation to put both at 2013 levels.

Obama’s tax plan, which is spelled out in detail in his budget proposals, would extend the Bush income tax cuts for all but the highest earners. He would also repeal the loophole that allows wages earned as a “carried interest” to be treated as lightly taxed capital gains. And he would limit the tax savings from itemized deductions to 28 percent of the amount deducted.

Romney’s tax plan would extend all of the Bush income tax cuts, reduce regular income tax rates (on non-capital gains and dividend income) by 20 percent, and repeal the Medicare tax expansion enacted in the Affordable Health Care Act. Romney has said he would also eliminate some tax breaks, but he has not specified even one of them. But clearly he does not plan to close the loopholes that matter most to him, i.e., the special low rates on capital gains and qualified dividends (which are part of the Bush tax cuts he has pledged to extend) and the special treatment of wages received as a “carried interest” as capital gains (asked whether he would close the “carried interest” loophole, Romney has said, “With regard to carried interest associated with venture capital, real estate, private equity, I do not believe in raising taxes”).

Tables with more details below:

 

Read the PDF Version of this Report.

The tax cuts enacted in 2001 and 2003 under President Bush are scheduled to expire at the end of 2012. As we approach the expiration date, there’s a growing debate about whether and how much of these temporary tax breaks should be extended. President Obama has proposed extending the Bush tax cuts for all taxpayers on incomes up to $250,000 ($200,000 for single filers). Some lawmakers have suggested moving the threshold to $1 million.

Based on our preliminary estimates:

  • High-income taxpayers still get a big tax cut. Using either threshold, even high income taxpayers still get to keep most of their Bush tax cuts. That’s because thetax cuts – primarily lower rates – still apply to income below the thresholdamount.
  • Ending the breaks for incomes over $250,000 saves substantial revenue. Extending the Bush tax cuts for only the first $250,000 of families’ incomes saves the U.S. Treasury an estimated $60-70 billion in revenue for one year alone, 2013, compared to extending all of the tax cuts.
  • Moving the threshold to $1 million is costly. Extending the Bush tax cuts for the first $1 million of a family’s income saves 43 percent less revenue than the savings estimated with a $250,000 threshold.
  • Millionaires get 50 percent of the additional tax breaks from moving the threshold to $1 million. About half of the additional tax breaks resulting from moving the threshold from $250,000 to $1 million actually go to taxpayers with income over $1 million – because they’re getting additional tax breaks on all of their income up to $1 million.

Read the PDF version of this document.

On Friday, May 4, the New York Times ran a letter from CTJ’s director, Robert McIntyre, responding to a recent Times article describing Apple’s tax dodging. McIntyre explains,

“In its latest annual report, Apple said that as of last September, it had a staggering $54 billion parked offshore (since grown, as the Times points out, to $74 billion).  Almost all of this huge hoard is accumulated in tax havens and has never been taxed by any government. More to the point, most of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore to avoid its United States tax responsibilities.

“There’s a simple way to curb this kind of corporate tax dodging, of which Apple is only one prominent example: repeal the tax rule that indefinitely exempts offshore profits from United States corporate income tax. If those profits were taxable (with a credit for any foreign taxes paid), then Apple alone would have paid an additional $17 billion in federal income taxes over the past decade. That would have tripled the federal income taxes that Apple actually paid.

“Congressional scorekeepers estimate that ending the offshore corporate tax exemption would increase overall federal revenues by about $600 billion over the next decade. That’s money that could be put to good use in these times of strained budgets.”

Postscript: In our major study of corporate tax rates last November (Corporate Taxpayers & Corporate Tax Dodgers), we reluctantly included figures on Apple that reported the company’s 2008-10 effective federal tax rate on its reported U.S. profits to be 31.3%. In our notes we pointed out, “For better or worse, we did, with grave reservations, include some potential “liar companies” that we highly suspect made a lot more in the U.S., and less overseas, than they reported to their shareholders (e.g., Apple . . . ). We urge our readers to treat these companies’ true “ef­fec­tive U.S. income tax rates” as possibly much lower than what we reluctantly report. We will be working more on this issue.”

Since then, we have spent quite a bit more time studying Apple’s annual reports. As our letter to the New York Times above notes, at the end of Apple’s 2011 fiscal year, it had accumulated $54 billion in cash offshore, almost all of it in tax havens, and almost all untaxed by any government. Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.

If we treat all of the untaxed portion of Apple’s offshore profits as really U.S. profits that were artificially shifted to offshore tax havens, then Apple’s U.S. tax rate is much lower than Apple reports. Under this approach, Apple’s 2008-10 effective federal tax rate comes to only 13.4%, and its effective federal tax rate over the last six years (2006-11) was only 12.1%. (Likewise, Apple’s revised effective state tax rate in 2008-10 was only 3.6%, instead of the 8.0% we reported in our state corporate tax study issued last December.)

This alternative calculation is not necessarily perfect, since some of the profits Apple booked in tax havens may have been shifted from foreign countries in which it actually does real business (such as countries in Europe). But even if only three-quarters of the untaxed tax-haven profits are really U.S. profits, then Apple’s actual 2006-11 federal tax rate is still only 14%, less than half of the 31% tax rate that Apple’s annual reports indicate.

A table showing the alternative calculations for Apple’s effective tax rate is at the bottom of this page.

Post-postscript: How do we know that Apple paid no tax to any government on almost all of its offshore cash hoard? Surprisingly, Apple actually tells us, although it takes a close reading of Apple’s annual reports and a knowledge of U.S. tax laws to understand.

The key is this: the U.S. indefinitely exempts U.S. companies from tax on the profits of their offshore subsidiaries. Only if a foreign subsidiary pays a dividend to its U.S. parent are those profits taxable. If the subsidiary has already paid income tax to foreign governments, the parent company gets a “foreign tax credit” against its U.S. tax for that foreign tax.

So here’s what Apple reveals in it annual reports: Apple says that if it told its foreign subsidiaries to pay Apple the whole $54 billion offshore amount as a dividend, then Apple would owe $17 billion in U.S. federal income taxes. That reflects a $19 billion tax at 35 percent, less a $2 billion foreign tax credit (the sum of all the foreign income taxes that Apple has ever paid). Which means, with a little more arithmetic, that about 90 percent of the $54 billion in accumulated offshore profits has never been taxed by any government.

This one page fact sheet includes the information you need to understand the debates taking place around Tax Day.

Read the fact sheet.

Tax Tips with Mitt

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Read the PDF of this report.

Tax Planning for the Super Wealthy

Millions of Americans will spend part of this upcoming weekend trying to navigate tax preparation software or filling out the actual paper forms to file their income tax returns before the Tuesday deadline. For those wishing they could pay less tax, outlined below are some tax planning ideas taken from a review of presidential candidate Mitt Romney’s tax returns.

Don't Work for a Living

The single best way to reduce your income tax bill is to make sure that your income is subject to the lower preferential rates for dividends and capital gains. The federal tax system taxes “ordinary” income, like salaries and wages, at much higher rates (up to 35%) than investment income (maximum 15%). Many states have capital gains tax breaks, too. The low capital gains tax rate explains Romney’s 14 percent effective federal income tax rate. Almost all of his income is taxed at the low rate — the ordinary income he does have, from interest and speaking fees, is mostly offset by his itemized deductions.

At any level of income, a taxpayer with income from capital gains and dividends will pay less than half of the federal income tax paid by a taxpayer with the same amount of wages. Here are some examples:

Federal Income Tax

If Wages

If Capital Gains

Single, doesn’t itemize, $60,000 income

$8,750

$2,400

Married, itemizes, $250,000 income

$43,400

$19,300

Married, itemizes, $20 million income

$6,276,000

$2,695,200


The wage earner pays payroll taxes on top of the income tax. So it’s best, like Romney, to be unemployed.

Federal Income and Payroll Taxes

If Wages

If Capital Gains

Single, doesn’t itemize, $60,000 income

$17,930

$2,400

Married, itemizes, $250,000 income

$63,900

$19,300

Married, itemizes, $20 million income

$6,867,100

$2,695,20


If You Do Work, Disguise Your Compensation as Capital Gains

Romney’s return does report quite a bit of compensation (in addition to that “not very much” in speaking fees of $529,000), but it’s disguised as capital gains, to make it subject to that special low rate. About half of the $15 million in capital gain and dividend income reported on his 2010 tax return is compensation from Romney’s partnership interests in Bain Capital funds.

These “carried interests” were earned by Romney in exchange for the services he performed while at Bain Capital. Private equity, hedge fund, and other investment fund managers structure their compensation so that most of it is received in the form of a partnership interest — a piece of the deal — and the income from those carried interests is taxed at the capital gain rate. In addition to paying a much lower income tax rate, Romney also avoids paying the Medicare payroll tax on the income.

Give to Charity — But Not Cash

If you give a gift of appreciated property, like stock, to a charity, your deduction is the value of the stock, even though you may have paid far less for it. In Romney’s return, there’s a deduction for just under $1.5 million worth of Domino’s Pizza stock (which he likely received in a Bain Capital deal) to the Tyler Foundation (more about that below). The price he paid for the stock was zero or something so close to zero that the accountant didn’t bother reporting it. Giving the stock to the foundation saved Romney an estimated $220,000 in taxes that he would have owed if he had sold the stock and given cash instead.

Give to Charity — But Not Now

In Romney’s tax return, there’s income from the W. Mitt Romney 1996 CRUT (that’s a Charitable Remainder UniTrust). That means Romney set up a charitable trust in 1996 (with a half million dollars or more) and he kept the right to receive income from the trust for a certain number of years or, quite likely, for the rest of his life.

In 1996 Romney got an income tax deduction for what will go to charity when the trust ends. The charity won’t get a dime until that trust ends (and it’s already been 15 years since the contribution), but Romney got a big deduction on his 1996 return (it’s hard to know how big without seeing the return). In addition, he or one of his close advisors can be the trustee of the trust and control the money until the trust ends.

In addition, the trust is a tax-exempt entity, so it can sell whatever assets are in the trust and pay no capital gains taxes, diversify Romney’s portfolio, and increase his investment return. Of course, at the end of the trust’s term, whatever remains in the trust must be distributed to a charity. In the meantime, Romney has enjoyed some generous tax benefits.

Give to Charity — Your Own

Of the almost $3 million in charitable contributions on Romney’s 2010 tax return, about half went to The Tyler Charitable Foundation which Mitt and Ann Romney set up in 1999. When Romney makes a contribution to the foundation, it is fully deductible on his personal income tax return that year.

The foundation itself doesn’t provide direct services like a soup kitchen does. The “private” foundation (whose donations come from only one or a few supporters) gives money to charities like the Boys and Girls Club (known as “public” charities because their support is from the public more broadly) that generally do provide direct services.

The foundation only has to distribute 5 percent of its assets each year. So while Romney got a $1.5 deduction for the amounts transferred to the foundation in 2010, the foundation can take its sweet time getting the money in the hands of a public charity. At the end of 2010, the foundation had over $10 million in assets.

Use Offshore Investment Vehicles

An American citizen is taxable on all of his income, no matter where he lives or where the income is earned. If the income is subject to any foreign tax, the taxpayer gets a credit against his U.S. tax, to avoid double taxation. Romney reduced his U.S. tax bill by almost $130,000 in foreign tax credits on his 2010 return.

The earnings on any foreign investments would be fully taxable in the year earned, so it seems there would be no tax advantage to investing offshore. But using certain foreign investment vehicles allows a U.S. taxpayer to avoid some rules and thereby save some tax.

(For tax nerds: Investing in a Bain Capital fund formed in the Cayman Islands through a PFIC (Passive Foreign Investment Corporation), for example, can save an individual investor tax by avoiding the limitations on miscellaneous itemized deductions. A tax-exempt investor, like Romney’s Individual Retirement Account, can avoid the Unrelated Business Income Tax (UBIT) by investing through a foreign corporation as well, instead of investing in the fund directly.)

There are reports that Romney may have taken advantage of the tax savings offered by investing through these offshore vehicles, although it’s not apparent from the tax return. The return does have 55 pages of forms for reporting Romney’s transactions with foreign corporations, foreign partnerships, and PFICs. At least eleven of the entities from which Romney earns income are located in countries considered to be offshore tax havens, such as Bermuda, the Cayman Islands, and Luxembourg.

Invest in Sexier Financial Instruments

If you’re investing in plain vanilla stock and bonds, you’re missing some tax planning opportunities. For example, Romney’s return includes a $415,000 gain from certain investments that get special treatment under the tax rules (for tax nerds: section 1256 contracts).

The gain on these investments is treated as 60 percent long-term capital gain and 40 percent short-term gain, no matter how long you’ve actually held the investment — even if it’s for only one day! The amount treated as long-term gain gets taxed at that special low capital gains rate. Romney’s return also discloses income from foreign currency transactions, swaps and other derivatives, and investments which are written up to market value each year.

Borrow Money Only to Invest

If you borrow money to buy a car, the interest is not deductible even if you need your car to get to work. If you use a credit card to buy personal items, that interest is not deductible. If you borrow money to buy a house, the interest is deductible but only on a loan of $1 million or less. (Romney’s three homes are valued in the neighborhood of $25 million.) If you borrow money against the equity in your home, interest on only $100,000 of principal is deductible.

But if, like Romney, your interest expense is “investment interest expense,” it is deductible, limited only by the amount of your investment income. When your investment income is in the millions of dollars, you can deduct a lot of interest.

Be Aggressive in Your Tax Planning

When a taxpayer engages in a type of transaction that the Internal Revenue Service has identified as potentially abusive, he must disclose that in his tax return. It’s called a “reportable transaction” and the taxpayer has to file a Form 8886 to tell the IRS about it. Romney’s 2010 return included six Forms 8886 (16 pages) related to investments in hedge funds and private equity funds.

But Don’t Do Anything Illegal

There’s nothing in Romney’s tax return that indicates anything necessarily illegal or improper. On the contrary, it appears that he has been conscientious in filing the necessary forms and disclosures.

In addition to the disclosures noted above, on Schedule B, Interest and Dividends, the “yes” box is marked on that pesky question about foreign financial accounts and “Switzerland” is shown as where the account is located. If Romney was going to use offshore accounts to illegally evade taxes (as opposed to merely avoid them), he might decide not to complete that part of the return or he might omit some of those disclosure forms.

For Your Return

While in theory any taxpayer could use the tax planning techniques outlined above, in reality only the wealthy can take advantage of them. It takes a substantial amount of money to set up a charitable trust, for example. In addition to the money you put in the trust, you have to pay the attorney who draws up the trust documents and the accountant who files the trust’s annual tax returns. So unless you’re making a pretty substantial contribution, the costs would outweigh the tax benefits.

You have to have significant resources to be able to structure your debt for the best tax result. Or to set up a private foundation. Or make offshore investments. Or structure your compensation as capital gains.

The fact that there doesn’t appear to be anything improper in Romney’s tax return — and yet the return is full of ways only a wealthy person can reduce his tax bill — is the problem.

Read the PDF of this report.

Congress should approve Senator Sheldon Whitehouse’s proposal to implement the “Buffett Rule” to raise badly needed revenue and make our tax system fairer, but should also recognize that this must be followed by far more substantial reforms. In particular, Congress can’t stop at limiting breaks for millionaire investors but should completely repeal the personal income tax preference for investment income, as President Ronald Reagan did in 1986.[1]

A previous CTJ report concluded that Senator Whitehouse’s bill would raise $171 billion from 2013 through 2022.[2] The non-partisan Joint Committee on Taxation (JCT) has estimated that it would raise much less revenue, probably because JCT overestimates behavioral responses to changes in tax rates on investment income.[3] But even if Senator Whitehouse’s bill would raise $171 billion over a decade, that’s only a fraction of the $533 billion that CTJ estimates could be raised by completely ending the tax preference for investment income.

Why We Need the Buffett Rule

The “Buffett Rule” is the principle, proposed by President Barack Obama, that the tax system should be reformed to reduce or eliminate situations in which millionaires pay lower effective tax rates than many middle-income people.

An earlier report from Citizens for Tax Justice explains how multi-millionaires like Warren Buffett who live on investment income can pay a lower effective tax rate than working class people.[4] As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, long-term capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).[5]

The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s secretary is said to make), and those with income exceeding $10 million.

For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (those with incomes exceeding $10 million), about a third get a majority of their income from investments and consequently have an average effective tax rate of 15.3 percent. This is the fairness problem that the “Buffett Rule” would address.

 

The Best Way to Implement the Buffett Rule: End the Tax Preference for Investment Income

The most straightforward way to implement the Buffett Rule would be to eliminate the personal income tax preferences for investment income. This would mean, first, allowing the parts of the Bush tax cuts that expanded those preferences to expire. Second, Congress would repeal the remaining preference for capital gains income, which would raise $533 billion over a decade.

When President George W. Bush took office, the top tax rate on long-term capital gains was 20 percent, and the tax changes he signed into law in 2003 reduced that top rate to 15 percent. The same law also applied the lower capital gains rates to stock dividends, which previously were taxed as ordinary income. If the Bush tax cuts, which were extended through 2012, are allowed to expire, then capital gains will again be taxed at a top income tax rate of 20 percent (meaning there will still be a tax preference for capital gains) and stock dividends will once again be taxed like any other type of income.

The Bush tax cuts for capital gains and dividends should be allowed to expire at the end of this year. In addition, Congress should repeal the capital gains break that will still exist (the special rates not exceeding 20 percent). Under this proposal, capital gains would simply be taxed at ordinary income tax rates. This would raise at least $533 billion over a decade. [6] The table above shows that 80 percent of the tax increase resulting from eliminating the capital gains preference would be paid by the richest one percent of taxpayers in 2014.

Senator Sheldon Whitehouse’s Buffett Rule Bill

Senator Sheldon Whitehouse of Rhode Island has introduced a bill that would take a more roundabout approach to implementing the Buffett Rule by imposing a minimum tax equal to 30 percent of income on millionaires. This would raise much less revenue than simply ending the break for capital gains, for several reasons.

First, taxing capital gains as ordinary income would subject capital gains to a top rate of 39.6 percent in years after 2012, while Senator Whitehouse’s minimum tax would have a top rate of just 30 percent. Second, the minimum tax for capital gains income would effectively be even less than 30 percent because it would take into account the 3.8 percent Medicare tax on investment income that was enacted as part of health care reform. Third, while most capital gains income goes to the richest one percent of taxpayers, there is a great deal of capital gains that goes to taxpayers who are among the richest five percent or even one percent but who are not millionaires and therefore not subject to the Whitehouse proposal.

Other reasons for the lower revenue impact of the Whitehouse proposal (compared to repealing the preference for capital gains) have to do with how it is designed. For example, Senator Whitehouse’s minimum tax would be phased in for people with incomes between $1 million and $2 million. Otherwise, a person with adjusted gross income of $999,999 who has effective tax rate of 15 percent could make $2 more and see his effective tax rate shoot up to 30 percent. Tax rules are generally designed to avoid this kind of unreasonable result.

The legislation also accommodates those millionaires who give to charity by applying the minimum tax of 30 percent to adjusted gross income less charitable deductions.

These provisions would not be necessary if Congress took the more straightforward approach of simply ending the tax preferences for investment income, which would simply require that all income be taxed at the same rates.

 

Photo of Warren Buffett and Sheldon Whitehouse via The White House and Transportation for America Creative Commons Attribution License 2.0

 


[1] The Tax Reform Act of 1986, signed into law by President Ronald Reagan, ended the tax preference for capital gains and resulted in a personal income tax that imposed the same rates on all types of income.

[2] Citizens for Tax Justice, “Policy Options to Raise Revenue,” March 8, 2012. http://ctj.org/pdf/revenueraisers2012.pdf

[3] The Joint Committee on Taxation (JCT) estimated that Senator Whitehouse’s bill would raise $47 billion over a decade. James O’Toole, “Buffett Rule would Raise Less than $5 Billion in Taxes a Year,” March 20, 2012. http://money.cnn.com/2012/03/20/news/economy/buffett-rule-analysis/index.htm CTJ’s report, “Policy Options to Raise Revenue,” includes an appendix that describes the literature concluding that JCT overestimates behavioral responses to taxes on capital gains.

[4] Citizens for Tax Justice, “How to Implement the Buffett Rule,” October 19, 2011. http://www.ctj.org/pdf/buffettruleremedies.pdf; Citizens for Tax Justice, “The Need for the ‘Buffett Rule’: How Millionaire Investors Pay a Lower Rate for Middle-Class Workers,” September 27, 2011. http://www.ctj.org/pdf/buffettrulereport.pdf 

[5] The health care reform law effectively expanded the Medicare tax to include a top rate of 3.8 percent and to apply to investment income for taxpayers with adjusted gross income in excess of $250,000 for married couples and $200,000 for single taxpayers.

[6] Figures used here incorporate the assumptions of the Congressional Budget Office that capital gains income will decline in 2013, presumably in response to the end of the Bush tax cuts, and then quickly recover in years after that.

Read the PDF of this Report. 

Last November, Citizens for Tax Justice and the Institute on Taxation and Economic Policy issued a major study of the federal income taxes paid, or not paid, by 280 big, profitable Fortune 500 corporations. That report found, among other things, that 30 of the companies paid no net federal income tax from 2008 through 2010. New information for 2011 shows that almost all these 30 companies have maintained their tax dodging ways.

In fact, all but four of the 30 companies remained in the no-federal-income-tax category over the 2008-11 period.

Over the four years:

  • 26 of the 30 companies continued to enjoy negative federal income tax rates. That means they still made more money after tax than before tax over the four years!

 

  • Of the remaining four companies, three paid fouryear effective tax rates of less than 4 percent (specifically, 0.2%, 2.0% and 3.8%). One company paid a 2008-11 tax rate of 10.9 percent.

 

  • In total, 2008-11 federal income taxes for the 30 companies remained negative, despite $205 billion in pretax U.S. profits. Overall, they enjoyed an average effective federal income tax rate of –3.1 percent over the four years.

“These big, profitable corporations are continuing to shift their tax burden onto average Americans,” said Citizens for Tax Justice director Bob McIntyre. “This isn’t fair to the rest of us, it makes no economic sense, and it’s part of the reason our government is running huge budget deficits.”

The Size of the Tax Subsidies:

Had these 30 companies paid the full 35 percent corporate tax rate over the 2008-11 period, they would have paid $78.3 billion more in federal income taxes. Or put another way, over the four years, the 30 companies received more than $78 billion in total tax subsidies. Wells Fargo alone garnered $21.6 billion in tax subsidies over the four years, followed by General Electric ($10.6 billion), Verizon ($7.7 billion), and Boeing ($6.0 billion).

Taxes in 2011:

In 2011 alone, 24 of the 30 companies paid effective tax rates of less than 4 percent, including 15 that paid zero or less in federal income taxes in that year. For all 30 companies, the average 2011 effective federal income tax rate was a paltry 7.1% — only a fifth of the statutory 35 percent federal corporate tax rate.

The Bottom Line:


The information on these 30 companies helps illustrate why overall federal corporate income tax collections are so low. The Treasury Department reports that corporate taxes fell to only 1.2 percent of our gross domestic product over the past three fiscal years. That’s lower than at any time since the 1940s except for one single year during President Reagan’s first term. By comparison, corporate taxes averaged almost 4 percent of our GDP during the 1960s.

“Getting rid of corporate tax subsidies that cause such widespread tax avoidance ought to be a key part of any deficit-reduction program,” said McIntyre. “As a bonus, revenue-raising corporate tax reform would make it much easier to fund the investments we need to improve education and repair our crumbling roads and bridges — things that would actually help businesses and our economy grow.”

Note: The 30 no-tax corporations over the 2008-10 period reported in CTJ’s November 2011 report included Computer Sciences, which had a negative 18.3% tax rate over the three years. Computer Sciences has an odd fiscal year, and will not file its financial statements until this summer. However, in entering 2011 data for Apache, we discovered that we had missed a well-hidden entry in Apache’s financial statements for excess stock option tax benefits. Including these tax benefits lowered Apache’s effective 2008-10 tax rate from +0.6% to –1.5%. As a result, we have included Apache in the 2008-10 notax list for this updated report.

For more charts and appendixes read the PDF here.

The U.S. Has a Low Corporate Tax

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Read the PDF of this report.

The U.S. Has a Low Corporate Tax: Don’t Believe the Hype about Japan’s Corporate Tax Rate Reduction

America has one of the lowest corporate income taxes of any developed country, but you wouldn’t know it given the hysteria of corporate lobbying outfits like the Business Roundtable. They say that because Japan lowered its corporate tax rate by a few percentage points on April 1, the U.S. now has the most burdensome corporate tax in the world.

The problem with this argument is that large, profitable U.S. corporations only pay about half of the 35 percent corporate tax rate on average, and most U.S. multinational corporations actually pay higher taxes in other countries. So the large majority of Americans who tell pollsters that they want U.S. corporations to pay more in taxes are onto something.

Large Profitable Corporations Paying 18.5 Percent on Average, Some Pay Nothing

Citizens for Tax Justice recently examined 280 Fortune 500 companies that were profitable each year from 2008 through 2010, and found that their average effective U.S. tax rate was just 18.5 percent over that three-year period.[1]

In other words, their effective tax rate, which is simply the percentage of U.S. profits paid in federal corporate income taxes, is only about half the statutory federal corporate tax rate of 35 percent, thanks to the many tax loopholes these companies enjoy. 

Thirty of the corporations (including GE, Boeing, Wells Fargo and others) paid nothing in federal corporate income taxes over the 2008-2010 period.

You might think that these companies simply had some unusual circumstances during the years we examined, but we find similar tax dodging when we look at previous years and the new data for 2011.

For example, GE’s effective tax rate for the 2002-2011 period (the percentage of U.S. profits it paid in federal corporate income taxes over that decade) was just 2.3 percent.[2] Boeing’s effective federal tax rate over those ten years was negative 6.5 percent, (meaning the IRS is actually boosting Boeing’s profits rather than collecting a share of them).[3]

U.S. Multinational Corporations Pay Higher Taxes in Other Countries

Some corporations complain that their effective tax rates are higher than we have concluded, but they are talking about their worldwide tax rates, including the taxes paid to foreign governments on profits they generate in other countries.[4] Including the foreign taxes paid makes the effective tax rate appear higher in many cases because these companies actually are being taxed at higher effective rates in the other countries where they do business.

This is extremely telling, because the entire argument of the corporate lobbyists is that the U.S. corporate income tax is more burdensome than any other corporate tax in the world. Besides, if the problem that corporations are complaining about is actually the high taxes they pay to foreign governments, how could Congress possibly provide any remedy for that? Clearly, what corporations pay in U.S. taxes is what’s relevant to the corporate tax debate before Congress.

Of the 280 corporations CTJ examined, 134 had significant foreign profits, meaning at least 10 percent of their worldwide pre-tax profits were generated outside the U.S. We found that, for 87 of these companies (about two-thirds of the companies with significant foreign profits), the effective corporate tax rate paid on U.S. profits was lower than the effective corporate tax rate paid to foreign governments on foreign profits.[5]

Of course, there are some countries that have extremely low corporate tax rates (rates of zero percent or not much higher than zero). These countries are known as tax havens, and they typically are not places where much actual business is done. Think of places like the Cayman Islands or Bermuda.

U.S. corporations engage in various dodgy accounting gimmicks to make it appear that their U.S. profits are generated by their subsidiaries in these tax havens so that they won’t be taxed. (Often these subsidiary companies consist of nothing more than a post office box a few blocks from the beach.) Eliminating the loopholes that allow these dodgy accounting gimmicks should be one of the major goals of tax reform.

Majority of Americans Are Right: Congress Should Raise Revenue by Closing Corporate Loopholes

The U.S. corporate income tax certainly needs to be reformed, but not in the way that corporate lobbyists are calling for. Congress should eliminate corporate tax loopholes and use most of the revenue savings to fund public investments and address the budget deficit.[6]

Unfortunately, most proposals to close corporate tax loopholes (including President Obama’s) would give all the resulting revenue savings back to corporations in the form of new breaks.[7] President Obama proposes a “revenue-neutral” corporate tax reform which would close loopholes and reduce the corporate tax rate to 28 percent, while some Republicans have proposed to reduce the corporate tax rate to 25 percent (even if that reduces revenues).

Most Americans want corporations to pay more overall in taxes than they do today. From 2004 through 2009, the Gallup Poll asked survey respondents if corporations pay their “fair share” in taxes, or if they pay “to much,” “too little,” or they’re “unsure.” Each year, anywhere from 67 percent to 73 percent of respondents said corporations pay “too little.”

In October of last year, a CBS/New York Times survey asked, “In order to try to create jobs, do you think it is probably a good idea or a bad idea to lower taxes for large corporations?” and 67 percent responded that this was a “bad idea.”

It is unclear why lawmakers have ignored their constituents’ desire for a revenue-positive reform of the federal corporate income tax. One reason may be misunderstandings about who is ultimately affected by corporate income taxes. Several empirical studies have concluded that they are ultimately borne mostly by owners of corporate stocks and business assets, who are concentrated among the richest one percent of Americans.[8]

Corporate lobbyists have argued that American workers ultimately bear the cost of corporate income taxes, because the taxes cause companies to move operations out of the United States. Even if one is unconvinced by the empirical studies leading to the opposite conclusion, common sense would suggest that corporations would not be lobbying to have corporate income taxes reduced if they didn’t believe their shareholders were the people ultimately paying them.

Whatever the reason for lawmakers’ qualms about raising corporate tax revenue, the debate over the budget deficit will force lawmakers to make a choice: Should we cut spending on things like education, infrastructure, environmental protection, and Medicaid and Medicare while doing nothing to raise corporate tax revenue? What does more to help the economy, these public investments or reductions in the corporate taxes that are ultimately paid by stockholders? The answers to these questions are pretty obvious for most Americans.

 

 


[1] Citizens for Tax Justice, “Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010,” November 3, 2011. http://ctj.org/corporatetaxdodgers

[2] Citizens for Tax Justice, “General Electric’s Ten Year Tax Rate Only 2.3 Percent,” February 27, 2012. http://www.ctj.org/taxjusticedigest/archive/2012/02/press_release_general_electric.php 

[3] Citizens for Tax Justice, “Obama Promoting Tax Cuts at Boeing, a Company that Paid Nothing in Net Federal Taxes Over Past Decade,” February 16, 2012. http://www.ctj.org/pdf/boeing2012.pdf

[4] For example, GE has lately responded to news about its low U.S. effective tax rate by simply stating that its worldwide effective tax rate is 29 percent. See Citizens for Tax Justice, “GE Tries to Change the Subject,” February 29, 2012. http://www.ctj.org/pdf/gedistraction.pdf. Large oil companies also complain about their high tax rates but almost always cite their worldwide tax rate, not their U.S. tax rate. See Kim Dixon, “Analysis: Gas Price Spike Revives Fight Over Energy Taxes,” Reuters, March 26, 2012. http://www.reuters.com/article/2012/03/26/us-usa-tax-bigoil-idUSBRE82P0DX20120326

[5] Citizens for Tax Justice, “Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010,” November 3, 2011, page 10. http://ctj.org/corporatetaxdodgers

[6] A CTJ fact sheet explains why corporate tax reform should be revenue-positive. Citizens for Tax Justice, “Why Congress Can and Should Raise Revenue through Corporate Tax Reform,” November 3, 2011. http://ctj.org/pdf/corporatefactsheet.pdf. A longer CTJ report has more detail. Citizens for Tax Justice, “Revenue-Positive Reform of the Corporate Income Tax,” January 25, 2011, http://www.ctj.org/pdf/corporatetaxreform.pdf

[7] Citizens for Tax Justice, “President Obama’s ‘Framework’ for Corporate Tax Reform Would Not Raise Revenue, Leaves Key Questions Unanswered,” February 23, 2012. http://ctj.org/ctjreports/2012/02/president_obamas_framework_for_corporate_tax_reform_would_not_raise_revenue_leaves_key_questions_una.php

[8] Jennifer C. Gravelle, “Corporate Tax Incidence: Review of General Equilibrium Estimates and Analysis,” Congressional Budget Office, May 2010, http://www.cbo.gov/ftpdocs/115xx/doc11519/05-2010-Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf; Gravelle, Jane G. and Kent A. Smetters. 2006. “Does the Open Economy Assumption Really Mean That Labor Bears the Burden of a Capital Income Tax.” Advances in Economic Analysis & Policy vol. 6:1.

CTJ Reports



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